This is a book review for Why Nations Fail? by Daron Acemoglu and James Robinson. The tl;dr is that this is a good book and an easy read and you should go out and read it.

This book has an ambitious goal. It tries to provide an answer for why certain countries are rich and why others are poor. Their main thesis is that it is institutions which determine this. More precisely, countries which have inclusive political and economic institutions fare well, while countries which have extractive institutions fare badly. So there’s two axes to consider, the political and the economic, and whether they’re inclusive or exclusive. Rather a simple model.

Inclusive political institutions are those which offer political power to a large segment of the population. These includes things like parliaments, separate powers in the state, checks on one part of government by another, diverse interests being heard and having the power to affect change, solid property rights and the general rule of law. Notably it doesn’t mean this taken to an Utopic limit, or even to the levels of advanced democracies today, but just enough so that there isn’t a single person or small elite controlling everything. Opposed, extractive political institutions are those which concentrate power, de facto or de jure, into a small set of elites, usually a set of families. These include things like kingdoms, dictatorships, but also immature democracies where there isn’t a real separation of powers because branches are subservient to an executive role, weak property rights and the so-called rule of man. Both require some sort of centralization in the state, usually the more the better.

Inclusive economic institutions are again those which allow access to economy and means of wealth to a broad segment of the population. Strong property rights and a fair playing field between economic entities are examples of such institutions. The hallmark though is the allowance for creative destruction - the replacement of one technology and its associated economic bloc with another and better one, without the fear of reprisals. Opposed are extractive economic institutions. These mean things like weak property rights, high taxation, the granting of monopolies to the elite or those close to them. Again, the hallmark is a resistance to change, because loss of economic power leads to a loss of political power, and the elites, which control both economic and political power are are opposed to that.

Naturally these come in pairs. Furthermore, once a semblance of inclusive institutions take root, there is a virtuous cycle of strengthening of these institutions in time. Similarly, a vicious cycle of strengthening of extractive institutions takes place for extractive ones. So out of the four possibilities only two are stable. Though it bears mentioning that historically change has been gradual and slow in the virtuous cycle, and faster for the vicious one.

Aside: It’s also worth noting that whether a feature is inclusive or exclusive is not really a binary choice. Calling it a spectrum or continuous value would be closer to the truth, but again a simplification. On the other hand, it is hard to deal with a vector-function on the whole society, so this is what the authors went with.

The central thesis is that the way to prosperity lies by having inclusive economic and political institutions. Similarly, the way to stagnation and poverty is that if extractive institutions. The basic reason has to do with technological progress which is the basis for economic progress and prosperity. This usually causes the distribution of economic power more towards those who are doing the inventions. Which results in them having political power as well. In an inclusive setup this is allowed, or rather cannot be stopped. So there are good incentives for people to improve technology, processes, start business etc. because the payoffs are good. In extractive setups, the ruling elite do not allow these things to happen because they have the power to stop any attempts at their power being eroded. So there isn’t any incentives for people to try things, because if they are successful, they have no guarantee of actually being able to hold on to them.

There’s a bunch of examples of how this happened. The most important one is that of Britain, which moved from a feudal extractive society and a small country at the edge of the world for most of its history to the birthplace of the Industrial Revolution in the 17th century and the center of the world in the 18th and 19th ones. All this while the economic and political institutions became gradually more inclusive. The colonial offshoots of the USA, Canada, Australia, New Zealand etc had similar trajectories. Countries like Spain or France did not follow a similar path until much later, and some of that is still felt, at least at the level of their colonies. Smaller scale examples are those of the NEP of Lenin’s USSR and various moves towards centralization in Sub-Saharan Africa.

An important factor is what the authors call “the contingent nature of history”. Or more plainly “sometimes life happens”. These are major events like wars or plagues, whose outcome and occurrence is random, but which interact with the institutions of a country and many times are the push needed for them to move further down the path of inclusiveness, or fall back towards extraction.

A major example of this is the Black Death, which was responsible for about 30 to 60 percent of Europe’s population dying. This had the secondary effect of driving up demand for farm laborers across Europe, giving the common peasant a much better negotiating position. But because of small differences in the institutions of Western and Eastern Europe, the peasants in the former were able to take advantage of this, and increase their pay & status, and effectively stopping the institution of serfdom, while the peasants in the east could not, and were even more tightly linked to their lords.

A particularly interesting example of the vicious cycle of extractive institutions is that of the Iron Law of Oligarchy, which more-or-less posits that once extractive institutions are in place, any societal change such as a revolution, will only change the operators, but leave the institutions in place. There’s a lot of examples from Sub-Saharan Africa in the late 20th century and South America in the 19th century.

An example missed is also Romania - and many Eastern Bloc countries. It’s a bit of common knowledge that whatever the Romanian Revolution was, it was later hijacked by the 2nd line of the Communist Party. But several contingent factors, such as joining the EU and NATO have put the country on a better path towards economic and politically inclusive institutions. Indeed, the economy has grown by a whopping 800% since the fall of communism. And while it hasn’t been evenly distributed, most everybody agrees things are better now than they were then.

The book is not perfect though. They state that they’re trying to build a model for national prosperity, but accept the fact that it will be coarse and not fit every case. They criticize several competing theories, like those put out in Guns, Germs And Steel by Jared Diamond (which I’all also review at some point, cause aim very close to finishing it), yet I saw those as natural extensions. While the former operated at a near past level and explained developments since the discovery of the New a World pretty well, the latter worked at a distant past level and explained why it was certain polities in Western Europe which were prepared to do the discovering, rather than some in Africa or the Americas. There is also a bit of selection bias in the case studies and perhaps a downplay of what growth under extractive institutions means. There is the implication that the 70 or so years of growth in the USSR was a small thing. But out of the 200 or so years of the industrial revolution it’s actually quite a lot. And sure, it’s not sustainable because it is not open to creative destruction, but it is still a big progress. Ditto for China, but with the shorter time-frame. There’s some more valid criticism here, as well as in more academic circles I’m sure.

But in any case, the model I think is a good one to have in your toolbox.