Humanity’s natural state is abject poverty. So how did some portion of the human race manage to escape this natural state? A remarkably insightful new book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Massachusetts Institute of Technology economist Daron Acemoglu and Harvard University economist* James Robinson provides an answer to that pressing question.
The book is somewhat misnamed since it really deals with how some nations succeed. The answer, in a word: institutions. In particular, the lucky development of “inclusive” political and economic institutions that interacted to generate a virtuous circle of sustained economic growth. Inclusive institutions and sustained economic growth are new in history.
Acemoglu and Robinson argue that since the Neolithic agricultural revolution, most societies have been organized around “extractive” political and economic institutions that funnel resources from the mass of people to small but powerful elites. Once they are on the gravy train, elites are naturally wary of economic growth since it could destabilize the social and political arrangements that make them rich.
Every set of extractive institutions is extractive in its own way, while all sets of inclusive institutions are inclusive in pretty much the same way. For example, ancient Rome ran on slavery; Russia on serfdom, Imperial China strictly limited domestic and foreign commerce; India depended upon hereditary castes; the Ottoman Empire relied on tax farming; Spanish colonies on indigenous labor levies; sub-Saharan Africa on slavery; the American South on slavery and later a form of racial apartheid not all that unlike South Africa’s; and the Soviet Union on collectivized labor and capital. The details of extraction differ but the institutions are organized to chiefly benefit elites.
So why don’t extractive elites encourage economic growth? After all, growth would mean more wealth for them to loot. Acemoglu and Robinson show that the institutions that produce economic growth are inevitable threats to the power of reigning elites. The “key idea” of their theory: “The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.” Thus throughout history reactionary elites naturally resisted innovation because of their accurate fear that it would produce rivals for their power.
On the other hand, inclusive institutions are much alike wherever they are arise and include democratic politics, strong private property rights, the rule of law, enforcement of contracts, freedom of movement of people, and a free press. Just how valuable are such institutions? In 2010, World Bank economists in their study, The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium [PDF] calculated that 80 percent of the world's wealth is intangible. While a good percentage of intangible wealth is accounted for by the level of education of a nation’s citizens, the majority of it is in fact embodied in inclusive institutions like honest bureaucracies, the rule of law, and democratic politics. The World Bank finds that the citizens in the 30 richest countries enjoy access to about $500,000 of intangible wealth per capita whereas the people living in the poorest countries have access to only above $4,000 of intangible wealth each.
So how did some places throw off extractive institutions and replace them with inclusive ones? Acemoglu and Robinson trace the rise of inclusive institutions and the process of technological development and industrialization to Britain. They argue that at various critical junctures in British history contingent events gradually shifted British political institutions away from absolutist toward more inclusive ones. They actually claim that the “radical changes” ushered in by Britain’s Glorious Revolution in 1688 “led to what perhaps turned out to be the most important political revolution of the past two millennia.”
The Glorious Revolution overthrew would-be absolutist monarch James II and began the process of establishing a constitutional monarchy in which Parliament would increasingly restrain the power of the king. What followed was a strengthening of property rights and the increasing application of the rule of law to all citizens alike. The economic system was opened up as Parliament dissolved more than 700 monopolies granted by the king. Certain British settler colonies such as those in North America and Australia developed inclusive institutions as well.
Acemoglu and Robinson also credit the French Revolution for helping eventually to engender inclusive institutions in Western Europe. While Napoleon certainly had imperial pretensions, he simultaneously tore down the institutions of the Church, absolutist monarchies, and commerce-stifling guilds that underpinned the ancien regime and spread the notion that all people were equal citizens governed by the rule of law. Despite more than a century of unsteady progress, eventually these liberal ideas caught on throughout Western Europe. Similarly in Japan, relatively pluralist institutions overthrew the Shogunate and jumpstarted prosperity in that formerly medieval country.
Consequently, inclusive institutions encouraged technological and entrepreneurial innovations that have produced the historically unprecedented rise in living standards in the United States, Western Europe, Japan, and Australia. Meanwhile the areas of the world where traditional extractive institutions were retained are still poor. Indeed, extractive institutions generate a “vicious circle” which maintains their stability. By stifling economic innovation elites prevent the rise of rival groups to contest their power. One result is the “iron law of oligarchy” in which so-called civil wars or revolutions are simply fights between elites seeking to gain control of the extractive institutions to enrich themselves and their cronies. Unfortunately, the Arab Spring revolutions in Egypt and Libya look like they are succumbing to this iron law.
But what about China? After all, its economy directed by a communist elite has been growing at about 10 percent per year for a couple of decades now lifting hundreds of millions out of abject poverty. Acemoglu and Robinson argue that growth is temporarily possible in extractive systems. While such growth does require opening up a bit, it is chiefly fueled by copying technology and processes from abroad. They, however, maintain that such growth must come to an end eventually since China’s communist elite shows few signs of accommodating the creative destruction that real innovation and continued economic growth requires. “As long as political institutions remain extractive, growth will be inherently limited, as it has been in all other similar cases,” they assert. They add, “There should be little doubt that in fifty or even hundred years, the United States and Western Europe, based on their inclusive economic and political institutions, will be richer, most likely considerably richer, than sub-Saharan Africa, the Middle East, Central America, or Southeast Asia.”
Why Nations Fail is persuasive, but somewhat unsatisfying, especially with regard to the question of why non-elites put up with elites? Their explanation for how transitions are made from extractive to inclusive institutions stresses that the process is historically contingent. Fair enough, but other scholars have devised a richer and deeper understanding of how human societies have evolved and produce wealth, one such is economics Nobelist Douglass North. Although the endnotes cite his work, the authors don’t apparently make much use of it in their own analysis.
In the magisterial 2009 volume, Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, North and his colleagues, University of Maryland economist John Joseph Wallis and Stanford University political scientist Barry Weingast, step back to look at why elites come into existence in the first place. The three begin by explaining that central problem confronted by societies encompassing more than a few hundred people is how to deal with the problem of violence. What they call the “natural state” emerges after the agricultural revolution as a way to handle the problem of social violence. Crucially, natural states are run by a coalition of elites and access to all organizations—religious, economic, or political—are limited to members of the elites. Thus natural states are a system of patron-networks in which people personally ally themselves with specific militarily potent individuals. Patrons offer protection and channel resources to clients in exchange for their loyalty and support should intra-elite violence break out.
Elites in natural states reward themselves by limiting access to valuable resources, e.g., by creating and sharing the rewards of monopolies. In the lexicon of Acemoglu and Robinson, natural states create and operate extractive institutions. Today, to those of us who are lucky enough to be living in open access orders what looks like corruption in places like Russia or Mexico is really just the more or less normal operations of distributing largess through patron/client networks. Social peace and monopoly extraction is maintained so long as members of the elite coalitions believe that fighting among themselves will not give them greater access to resources and power.
North and colleagues argue that in the 19th century a small group of societies transitioned from natural states to “open access societies” in which a large number of individuals gain the right to form economic, political, and social organizations without the permission or patronage of elites. In the lexicon of Acemoglu and Robinson, inclusive institutions are created. Economic and political competition (creative destruction) produces a “virtuous circle” by making it difficult for would-be elites to reestablish themselves.