Why Nations Fail: The Origins of Power, Prosperity and Poverty [Hardcover]

I approached this with hesitation, after reading other reviews. I thoroughly enjoyed reading it - but of course it is a long academic treatise, setting out bags of evidence and potential evidence and a simple central economic thesis for which it argues, at length.

The thesis is a thesis about growth, which the authors see as the test of the success of nations. (Others might think of course, that this isn't just about growth and GDP, but you can see what they have in mind.) Growth is only possible if there is a centralised state. No centralised state, as in Somalia, just means chaos and no prospect of growth. If there is a centralised state, there be what the authors call an 'absolutist' regime where all power is concentrated in the ruler and the ruling elite and there can be growth for a while and of a kind - centrally driven growth, as under Stalin in Russia between 1930 and 1970 as labour was moved from the fields to the cities, or under the Chinese regime today, which has done something to address the need for incentives economically. But such growth will come to an end (and often it doesn't happen at all, because it's against the personal interest of the ruler or ruling elite) - because the essence of ongoing growth is 'creative destruction' the invention of new technologies etc which will throw up a new class of rich people. That's only going to happen in a world in which property rights are secure and there are incentives to innovate and invest. Of course whether that will happen is a matter of history and history is 'contingent' - you can't tell what will happen. The Young Pretender reached Derby in 1745. If he had reached London and regained the throne for the Stuarts, history in England would have been different, and the Industrial Revolution might not have happened.

There are many powerful illustrations of the central thesis in the book. The two halves of Nogales, one half in Mexico and one in the US. The two halves of Korea. And there's a lot of history telling. There's also lots of interesting history. In terms of colonial exploitation of new lands, an accidental difference between North and South America. In the South, there were plentiful natives and plentiful gold and silver to exploit - and a playbook for the colonial power (capture the local king, torture him generally or often to death, and demand rooms of gold and silver). In the North by contrast, there is a sparse population of natives; and no gold or silver. The playbook doesn't work. And people need to be incentivised to work and earn for themselves. Hence inclusive economic and political institutions....Similarly story in Australia...

What might you wonder about here? Well, the 'history is contingent' line takes up a lot of the book. The authors develop a theory of virtuous and vicious circles and what makes it more likely that the right institutions will develop (you start off on the right path, and then it's not quite in the interests of anyone to seize control of the state, because there isn't quite such a thing - power is pretty dispersed already). I would be interested to know if game theory could help here - it isn't discussed. Then you might wonder about states that have been apparently inclusive that cease to be so. Germany under National Socialism for example is not discussed. And then you might wonder just how far political and economic institutions need to be inclusive to drive growth and the success of nations. England gets the thumbs up for the Magna Carta, the Glorious Revolution and so on, which points it on the right path. The industrial revolution happens, however, with a very limited franchise - and no votes at all for women.

Not the least of the merits of the book, though, are the hard thoughts that its 462 pages present. I would very strongly recommend it.

The success of this book mirrors the progress of the "inclusive institutions" idea it talks about.

The author wrote about this stuff six years ago but did not capture the imagination of the general public. What Acemoglu does not know about growth is not worth knowing, he's the author of an excellent graduate textbook on the subject. But two transformational events have happened since 2006 that have made his ideas relevant and current: the financial crisis and, by dint of having survived it well, the emergence of China in the public's consciousness as a financial superpower.

My prejudice has always been that, warts and all, our pluralistic, capitalist, free-market system works very well. With an eye on the recent performance of markets and the increasing and often justified perceptions of stagnation and inequality in our western society, however, many people these days argue that there's another way and that China holds many of the answers. This is the book that gives you all the ammunition to demolish that theory. I think that is the secret of its massive success.

But that's a mere bonus, and the theory itself is quite beautiful. Here it is, in ten quick bullet points.

1. You can totally forget about growth if nobody holds the "monopoly on violence." You get places like Somalia, Afghanistan etc.

2. There are two types of politics: inclusive and extractive

3. There are two types of economic institutions: inclusive and extractive

4. Extractive political institutions often don't care at all for growth or innovation, lest a new order arises and the new order challenges these extractive political institutions. The author quotes examples from English history where kings and queens stifled innovation in weaving, Austrian history, where the king did not build any railways and Ottoman history where the sultan pretty much banned books.

5. Regardless, growth has occurred in history under extractive political and economic institutions. The Soviet Union provides such an example. The manner in which this was achieved was not through innovation, but through the reallocation of resources from less productive activities (agriculture) to more productive activities (industry). The Soviet Union grew for 30 consecutive years at 6% per annum on the back of this planned reallocation of resources (eat that, China!) and was fully expected by nonpartisan observers to overtake the US economy by the turn of the 20th century. This never came to pass because once the resources had been fully reallocated there was no further productivity gains to be gleaned and thus no growth to be had. The ugly facet of extractive economic institutions reared its ugly head, as people simply refused to give their best if they could not enjoy the fruit of their labor. Draconian punishments for people who shirked their duties could not compensate for the lack of personal incentive and the Soviet empire crumbled.

6. The combination of inclusive political institutions with extractive economic institutions is typical of empires and it can work for a while. Rome is the example here. Rome was a republic, but was a ruthless extractor of wealth from its empire. It grew, but only by increasing the size of the empire, as the economic agents (the conquered lands) did not really push the boat out just to send the whole harvest back to Rome. So when Rome stopped expanding at the necessary pace, that was the end of growth at the pace that was necessary to support inclusive political institutions (lots of guys in Rome sitting around pondering on the greater issues in life and citing poetry to one another). What happened next is the political institutions reversed back to extractive, as factions in Rome fought each other for the loot. This occurred hundreds of years before the empire itself fell, significantly. But it was at the core of the decline.

7. The combination of inclusive economic institutions under extractive political institutions has also been tried and ultimately fails if there is no success in transforming the politics. Venice is the example here, and China is the current laboratory. The idea here is more subtle. The inclusive economic institutions go away and do their thing and produce growth. The Venetians ploughed the seas and dominated commerce through the invention of limited companies. The Chinese have set up the factory of the world by partnering with foreign manufacturers. This has brought serious wealth to both Venice and China. Trouble is, the fact that the political institutions are extractive means that the speed limit is lower. Intellectual property rights (not mentioned by the author, NB) spring to mind in China. You would not invest in an idea in China, because you just don't know that a government controlled company won't take it from you immediately. The lower speed limit means you at some stage hit a limit on growth. At that stage, you get reversal. China, for example, is stuck assembling phones designed in California. (again, the author is not stupid enough to write this, he wants his book to sell in China too) The authorities in Venice (the extractive political institutions) closed down the right any layman had to be part of a limited company and wrote in a "libro d'oro" the names of those who could. The extractive political institutions reversed the progress and forced the economic institutions to go extractive.

8. The main problem is that there is a strong vicious cycle between extractive economic and extractive political institutions. It's also called the "Iron law of oligarchy" apparently. If the inclusive economic institutions are not producing enough to feed the beast, their masters fall prey to the extractive political institutions they are perceived to be challenging. If they are producing too much, too quickly, they are usurped. And to get there in the first place is a rather large challenge to begin with. Fortunately, there's also a virtuous circle between inclusive economic and inclusive political institutions. Acemoglu quotes as an example the case where FDR thought 56% of the popular vote was enough of a mandate for him to stuff the Supreme Court with his own guys. Did not work for him.

9. More often than not, unfortunately, the starting point of societies is some sort of king lording it over a bunch of subjects. So you start with extractive politics sitting on top of extractive economic institutions. How do you make any headway? It takes all of the following: (i) a benign monarch / king / bunch of "elders" / dictator / potentate / senate / whatever / who "gets it" (ii) some kind of plurality on the ground. Like maybe layers of power, or a variety of tribes or a variety of jobs people do. Or some type of nominal alternative (even dormant) power structure left from years before. That way there are many "interests" on the ground that both push for change from many angles, but also fail to move things in any single direction after change has occurred (iii) a significant transformational event, such as the discovery of America that enriched the merchant class or the black plague that made labor so thin on the ground that it was able to negotiate better terms or at least led it to revolt and plant the seeds of transformation later. What happens next is you travel a few yards toward more inclusive institutions and with a bit of luck you don't lose that ground. History is not destiny. The UK did not have to become a pluralistic economy, it had all of the above and good luck, and it got it all at regular instalments. An important point the author makes is that the same events work for some and don't' work for others and the difference on the ground that made it click in England but not in Austria could be truly tiny. You really need the luck. That said, once you get your "first down" things get easier. The guys on top have less of a good thing to defend and the guys at the bottom get a better idea of how much there is to gain!

10. The best way to get there, though, is to send a bunch of guys from a highly developed place, who command the latest technology, to a sparsely populated remote land where nobody is around to challenge them. Provided there isn't enough of them to go around, all extractive political baggage they bring gets checked at the door as they all need to knuckle down to work to avoid starving. The author quotes North America and Australia, but Magna Grecia is a fantastic example from antiquity, when Spartan settlers (Sparta being the Soviet Union of antiquity) set up some very inclusive cities in southern Italy and Sicily. Does not work nearly as well if they land in the middle of a highly evolved and densely populated extractive civilization, on the other hand. The temptation there is to exterminate the local leader and sit on his throne. It's pretty much what the Spanish did in Latin America.

AND THAT'S REALLY IT

Acemoglu is not happy to just discuss his theory, he also spends some time going over alternative theories, such as the theory that the tropics are not conducive to growth and such like, but dismisses them in a manner that is polite enough not to offend. Proponents of such theories even praise him in the jacket of the book. There's a single exception. He spends quite some time toward the end of the book to deal with a theory he considers pernicious. He takes issue with the idea that if we trade enough with the Chinese they will get rich enough that they will come around to espousing democracy. Or that if we install democracy in Iraq the locals will pick up where we left off. He applies the tools discussed above and as far as I'm concerned he succeeds in debunking one of the main pillars of modern western policy. Read more ›

I bought this book when I read a favourable review and thought it would be interesting to explore the reasons why some states succeed economically, while others never `take off' and others take flight but stall. I smelt a rat when I started to find that the style of writing is repetitive and circular and when I found some straightforward factual errors.

The authors say that the Spanish Armada was pursued (by the English) `all round the coasts of Britain'. Well no: we stopped pursuing it off the coast of Kent, and it sailed home via the North Sea and the Atlantic because there was no other way back. The Armada was largely destroyed by bad weather, off the West coasts of Scotland and Ireland. Likewise, the authors say - as if there is some significance in this - that at one time England and Hungary were ruled by the same dynasty, the Angevins. Well, it depends what you mean by `Angevin': it was a prolific house; but the Angevin dynasty in Hungary did not come to power until the fourteenth century, by which time we English call our kings `Plantagenets'. They may have been descended from Angevins, but conventionally the Angevins ruled England in the twelfth century; and they were only remotely related to those who ruled in Hungary, Naples, Anjou and Provence.

The detail matters. If you can't get the facts straight, what hope is there for the grand theory?

When you look at the `case studies', the history here is truly crude - almost like Sellars and Yeatman's `1066 and All That', but without the humour. Take English history, which I know something about. The authors place far too much importance on the Black Death of 1381 (feudalism did not come to an end overnight as a result of that event, catastrophic though it was). They accept Geoffrey Elton's account of the `Tudor Revolution in Government', when this was largely discredited by medievalists, almost as soon as it was formulated. They regard Christopher Hill's account of the so-called `English Revolution' of 1640-60 as being the last word, ignoring at least four decades of criticism. They overemphasize the importance of the Glorious Revolution and ignore how English society was between 1688 and 1832 (and beyond), notwithstanding the Industrial Revolution. They constantly confuse `England' with `Britain'.

If the treatment of English history is so brief and sweeping as to be a caricature, it makes me wonder about the history of other countries; and I am very suspicious of the authors' treatment of Japan, Venice and Ancient Rome in particular. With regard to Rome, they take it as read that the Roman Empire declined before it fell; but there is a very respectable view that it simply fell, when invaded by the Barbarians; and the authors detect the seeds of decay as far back as the reign of Augustus. What then of Gibbon's view that mankind's happiest days were passed in the age of the Antonines, in the second century A.D.?

The problem is that the authors purport to be experts on everything and on every age, when in fact they are masters of nothing but a theory; and the theory is so broad and vague as to be almost incapable of proof or disproof. Thus centralisation + inclusive institutions = lasting economic success and prosperity. I think I go along with this to some extent; but the terms are very elastic. What degree of centralisation counts as such? What is meant by `inclusive' or for that matter `extractive'? They may be right about the USSR and China; but I am not sure they have explained why the former failed and why the seemingly inexorable rise of the latter may be an illusion.