Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson

The book Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson explores the root cause of why there are huge differences in freedom and prosperity between rich and poor countries.

It explores "huge differences in incomes and standards of living that separate the rich countries of the world, such as the United States, Great Britain, and Germany, from the poor, such as those in sub-Saharan Africa, Central America, and South Asia".

Nations become rich, inclusive and strong "because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed". The organized people themselves achieved this at critical political junctures in history. They created inclusive and benevolent institutions to broadly distribute political and economic rights.

Conversely, some Nations stay poor and weak because "their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate."

Crucially, the authors rule out(or minimize) the effect of religion, geography, culture, or ignorance(lack of knowledge) on success or failure of Nations.

What leads to prosperity

"Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people."

The "rules" and "institutions" is what people refer to as the System.

"Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. "

"Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed".

"the reason that Britain is richer than Egypt is because in 1688, Britain (or England, to be exact) had a revolution that transformed the politics and thus the economics of the nation. People fought for and won more political rights, and they used them to expand their economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the Industrial Revolution".

Why nations fail?

"The most common reason why nations fail today is because they have extractive institutions."

"The political institutions of a society are a key determinant of the outcome of this game."

"A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations."

The authors give example of India's caste system: "development of a uniquely rigid hereditary caste system that limited the functioning of markets and the allocation of labor across occupations much more severely than the feudal order in medieval Europe. "

"NATIONS FAIL TODAY because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate."

Never under-estimate the damage petty people with power in bad institutions can do.

Feedback loop for political institutions

The book talks of "THE VIRTUOUS CIRCLE: How institutions that encourage prosperity create positive feedback loops that prevent the efforts by elites to undermine them". In other words, good institutions create conditions for good ideas to spread, and protect themselves and the public from those who wish to exploit.

Over time, the virtuous circle of positive feedback loop and compounding effect creates even more freedom and prosperity.

Authors give example of James Watt and his discovery of Steam Engine. There was potential for creative destruction and disruption. The institutions of the time did not block these discoveries, but supported them. This led to even greater prosperity by kickstarting the Industrial Revolution which eventually contributed to establishment of the British Empire.

The book also talks of "THE VICIOUS CIRCLE: How institutions that create poverty generate negative feedback loops and endure". In other words, bad institutions punish those who try to do good and endure any efforts to reform.

The book talks about why people in Congo "did not adopt superior technology was because they lacked any incentives to do so. They faced a high risk of all their output being expropriated and taxed by the all-powerful king".

Why would anyone risk investing his time and money when there is risk of their output being expropriated?

The risk of output and assets being expropriated also leads to culture of low trust.

"It might be true today that Africans trust each other less than people in other parts of the world. But this is an outcome of a long history of institutions which have undermined human and property rights in Africa. "

"If I go back with money the government will say, ‘Give that money to us..."

What does NOT influence prosperity or cause Nations to fail

Religion does NOT influence prosperity: "there is little relationship between religion and economic success".

"you’ll see that none of the economic successes of East Asia have anything to do with any form of Christian religion, so there is not much support for a special relationship between Protestantism and economic success there, either."

Geography and culture DO NOT influence prosperity: "Just like the geography hypothesis, the culture hypothesis is also unhelpful for explaining other aspects of the lay of the land around us today."

Singapore is far more prosperous and free than Sri Lanka even though both of them have similar geographical location on the busiest shipping lanes of the world.

Land locked Switzerland in heart of Europe is far more prosperous and free than Ukraine or Hungary in spite of sharing similar geography at fault lines of European and Russian civilizations.

Ignorance: "ignorance can explain at best a small part of world inequality".

"if ignorance were the problem, well-meaning leaders would quickly learn what types of policies increased their citizens’ incomes and welfare, and would gravitate toward those policies."

"Although the ignorance hypothesis still rules supreme among most economists and in Western policymaking circles—which, almost to the exclusion of anything else, focus on how to engineer prosperity—it is just another hypothesis that doesn’t work."

This is crucial. The authors give several examples in the book of people from different cultures, religion, and geography to illustrate that they do not influence prosperity.

It is also NOT the lack of hard work and NOT the lack of entrepreneurship spirit that keeps people and nations poor. To quote George Monbiot: "If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire."

People across diverse cultures, religion, and geography know the "System" consisting of the institutions of police, courts, and bureaucrats exploit them. But they are unable to do anything about it. They missed the opportunities at "critical political junctures" in history to create inclusive institutions. So, now they have to live under powerful exploitative extractive institutions that are not easy to get rid of.

Who creates these political(and economic) institutions?

People themselves create these political(and economic) institutions.

These political(and economic) institutions are not a freak of nature, not a freak of history, or a unique byproduct of culture or religion or geography or enlightenment.

The authors talk of "critical political junctures" in history. These "junctures shape the path of economic and political institutions".

In other words, if the people take advantage of critical political junctures in history, they can use that opportunity to create inclusive political(and economic) institutions that fosters freedom, human rights, motivation to grow and succeed. This leads to sustained economic development.

Those who are prepared, work together in an organized group, and dare... win. It is simple as that. There is no magic to it.

"The massive scarcity of labor created by the plague shook the foundations of the feudal order. It encouraged peasants to demand that things change... They got what they wanted".

"black intellectual Frantz Fanon: Each generation must, out of relative obscurity, discover its mission, fulfill it or betray it."

"We continue to fight because we are tired of being perpetual victims of state sponsored poverty and human degradation visited on us by years of autocratic rule and militarism. But, we shall exercise restraint and continue to wait patiently at the rendezvous of peace—where we shall all be winners. We are committed to peace, by any means necessary, but what we are not committed to is becoming victims of peace. We know our cause to be just and God/Allah will never abandon us in our struggle to reconstruct a new Sierra Leone."

"Politics is the process by which a society chooses the rules that will govern it."

Milton Friedman is the recipient of the Nobel Prize in Economics in 1976. He won the prize "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy". He was Prof. at University of Economics and is regarded as leader of Chicago School/Field of Economics.

He wrote a short 24-page booklet "Why Government Is the Problem".

Political centralization as pre-requisite

One of the pre-requisite for creation of these political(and economic) institutions is political centralization, or social cohesion, or "preexisting traditional political institutions".

People have to have something natural/historic/organic in common. "When the state fails to achieve almost any political centralization, society sooner or later descends into chaos".

"Nations that have achieved almost no political centralization, such as Somalia and Afghanistan... are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions."

"preexisting traditional political institutions" can be leveraged for political centralization.

Can we engineer prosperity and riches into a nation?

"changing institutions is much harder than it first appears. In particular, extractive institutions can re-create themselves under different guises". This is probably why violent overnight revolutions and quick fixes don't lead to change or long term prosperity.

The authors gives examples from India and Africa to support this argument where several good initiatives were undermined because the existing political institutions benefited from the status quo.

"one lesson is clear: powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded."

"Fundamentally it is a political transformation of this sort that is required for a poor society to become rich."

Critical political junctures in history when there is ongoing (creative)destruction is the time for this change.

"You can't engineer prosperity... by providing the right advice and by convincing politicians of what is good economics".

Short term prosperity

Authors talk of Stalin's Soviet Union, Middle East countries, and China today as examples of nations with short term prosperity from centralization and "reallocating labor and by capital accumulation through the creation of new tools and factories."

Nations exploit natural resources, leverage people, and new technology to bring short term prosperity. But this does not sustain.

"Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way."

Importance of ground-work and being prepared

Although this book does not elaborate on it, doing the hard work or ground work, and spreading ideas among the public can influence the destiny of a nation at the critical political junctures.

Milton Friedman in his short 24-page booklet "Why Government Is the Problem" says:

"the panic of 1837, and a major depression in which most of these state enterprises went broke, and the public at large became persuaded that the states could not run those things. I believe that is one reason why private enterprise flourished for the next century."

"In the 1930s, it went the other way. It is ironic that the Great Depression was produced by government but was blamed on the private enterprise system. The Federal Reserve System explained in its 1933 annual report how much worse things would have been if the Federal Reserve had not behaved so well, yet the Federal Reserve was the chief culprit in making the depression as deep as it was. So the government produced the depression, the private enterprise system got blamed for it, and there was a tremendous change in attitudes. When you say ideas are not important, that change in attitudes would not have been possible if the groundwork had not been laid by the socialist intellectuals in the 1920s." The work of socialist intellectuals done before the Great Depression allowed the government to propose the New Deal which led to political and economic rights beਗng more broadly distributed.

Takeaway and Call to action

"People fought for and won more political rights". This is what we need to do, including fighting for the all important property rights.

"powerful groups often stand against economic progress and against the engines of prosperity". It is not an easy fight.

A pre-requisite is political centralization, or social cohesion, or "preexisting traditional political institutions". People have to have something natural/historic/organic in common in a relatively homogenous society to bring them together so they can work together. "the presence of some degree of centralized order" "would make the process of empowerment more likely to get off the ground".

People have to be ready, pre-empt, and take advantage of critical political junctures("rendezvous of peace") in history. People then have to use that opportunity to create inclusive political(and economic) institutions that foster freedom, human rights, motivation to grow and succeed.

Critical political junctures in history when there is ongoing (creative)destruction is the time for this change.

Culture, religion, and geography have nothing to do with this. Prosperity can not be engineered by an external force.

Those who are prepared, work together in an organized group, and dare... win. It is simple as that. There is no magic to it.


Tweet

Related articles

End Times: Elites, Counter-Elites, and the Path of Political Disintegration: Peter Turchin

How to change the world

External Links