The Cure for Abject Poverty

A new book argues that inclusive institutions offer the best path to prosperity.

Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Daron Acemoglu and James Robinson, Crown Business, 544 pages, $30

Humanity’s natural state is abject poverty. So how did some humans manage to claw their way to prosperity? An 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 perennially urgent question.

The book is somewhat misnamed since it really deals with why some nations succeed. The answer, in a word: institutions. Acemoglu and Robinson argue that since the Neolithic agricultural revolution, most societies have been organized around “extractive” institutions—political and economic systems that funnel resources from the masses to the elites. Once they get on the gravy train, the elites are wary of economic growth, since it could destabilize the social and political arrangements that make them rich.

By contrast, “inclusive” political and economic institutions generate a virtuous circle of sustained economic growth. Although the authors don’t say so, the nature of these inclusive institutions is succinctly captured by the concept of liberty, defined as freedom from arbitrary or despotic government. Historically speaking, such institutions are a recent phenomenon.

The institutions that produce economic growth, Acemoglu and Robinson show, inevitably threaten 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 have resisted innovation because they correctly worried that it would jeopardize their status.

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. Ancient Rome had slave power, Imperial China had strict limits on domestic and foreign commerce, Russia had serfdom, India had hereditary castes, the Ottoman Empire had tax farming, Spanish colonies had indigenous labor levies, sub-Saharan Africa had slavery, the American South had slave labor and later a form of racial apartheid, and the Soviet Union had collectivized labor and capital. The details of extraction differed, but the institutions were organized chiefly to benefit elites.

Inclusive institutions, by contrast, are similar to one another in their respect for individual freedom. They include democratic politics, strong private property rights, the rule of law, enforcement of contracts, freedom of movement, and a free press. Just how valuable are such institutions? In 2011 World Bank economists led by Kirk Hamilton published The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. In that report, they calculated that 80 percent of the world’s wealth is intangible. While a nation’s level of education accounts for a substantial portion of its intangible wealth, most is embodied in inclusive institutions such as honest bureaucracies, the rule of law, and democratic politics. The study found that 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 about $4,000 each. 

So how did some places throw off extractive institutions and replace them with inclusive ones? Acemoglu and Robinson trace the rise of positive institutions and the process of technological development and industrialization to Britain. They 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. Parliament dissolved more than 700 monopolies granted by the king, opening up the economic system. Certain British colonies, such as those in North America and Australia, developed inclusive institutions as well.

The French Revolution also earns praise from Acemoglu and Robinson for helping to engender inclusive institutions in Western Europe. While Napoleon certainly had imperial pretensions, he tore down the extractive institutions of the Church, absolutist monarchies, and commerce-stifling guilds that underpinned the ancien regime, and replaced them with the notion that all people were equal citizens governed by the rule of law. Despite more than a century of unsteady progress, eventually those liberal ideas caught on throughout Western Europe. Similarly in Japan, relatively pluralist institutions overthrew the Shogunate and jump-started prosperity in that formerly medieval country. 

Inclusive institutions encouraged technological and entrepreneurial innovations that produced a 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 remain ensconced are still poor. Indeed, extractive institutions generate a vicious circle that 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,” which holds that 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. 

What about China? Its economy is directed by a communist elite, but it has been growing by 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, chiefly through copying technology and processes from other nations with inclusive systems. But China’s communist elites show few signs of accommodating the creative destruction that real innovation and continued economic growth require. “As long as political institutions remain extractive,” Acemoglu and Robinson write, “growth will be inherently limited, as it has been in all other similar cases.” 

Unless unforeseen critical events shift extractive societies toward more inclusion, they argue, “There should be little doubt that in fifty or even a 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 somewhat unsatisfying with regard to the question of why the masses put up with extractive elites. The transition from extractive to inclusive institutions is historically contingent, the authors claim. Fair enough, but other scholars have demonstrated a richer and deeper understanding of how human societies evolve and produce wealth.

In the magisterial 2009 volume Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, Nobel Prize–winning economist Douglass North and his colleagues, University of Maryland economist John Joseph Wallis and Stanford University political scientist Barry Weingast, step back to consider why elites come into existence in the first place. The central problem confronted by societies encompassing more than a few hundred people is how to deal with violence. What the three authors call the “natural state” emerges after the agricultural revolution as a way to handle the problem of violence. Crucially, natural states are run by a coalition of elites, and access to all organizations—religious, economic, or political—is limited to this upper tier. Natural states are a system of patron networks in which people personally ally themselves with militarily potent individuals. Patrons offer protection and channel resources to clients in exchange for their loyalty and support should intra-elite violence break out.

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  • ||

    "Why Nations Fail is somewhat unsatisfying with regard to the question of why the masses put up with extractive elites."

    Easy thing to do when the masses are raised on a steady diet of revisionist history and discouraged from making their own economic decisions.

  • Pound. Head. On. Desk.||

    Misinformation can have wild effects. Example?
    People are shocked I think it's OK for children to play outside like I did when I was a child. Never mind the crime rates are lower than since before I was born.

  • Night Elf Mohawk||

    "Why do you want you kid to be kidnapped and murdered?"

  • Brett L||

    How else am I going to get on reality TV?

  • ||

    At what point does misinformation become propaganda?

  • BakedPenguin||

    Once it is disseminated with knowledge of its falsehood.

  • sarcasmic||

    Never mind the crime rates are lower than since before I was born.

    When you were a kid news stayed local. Every little crime in Podunk USA was not headline news on every paper in the country.

    Sure crime is down. Reporting methods have most people thinking it has never been worse.

  • R C Dean||

    "Why Nations Fail is somewhat unsatisfying with regard to the question of why the masses put up with extractive elites."

    Isn't it just the same ol' public choice problem again?

    The costs to an individual of opposing the elites are (potentiall) very high. The cost of going along are known and generally survivable.

  • The Derider||

    There's a positive externalities problem as well.

    A revolution against those elites would benefit everyone (except the elites), but you don't need to be a revolutionary to benefit from the revolution -- just not an elite.

    Thus people have an incentive to free-ride on the revolution, reducing the supply of revolutionaries.

  • Almanian's Evil Twin||

    1) I find this less than provocative in getting to "why" these changes occur. "Because there are 'doorways' that may - but often don't - lead to similar outcomes - or not..." Less than compelling.

    2) Also - honest bureaucracies. Really? Oxymoron.

    I'll give it a miss - but thank you, Ronald, for slogging through it and sharing your thoughts with us.

  • Cytotoxic||

    Not all bureaucracies are the same. We really are better off with ours versus Africa's.

  • ||

    "We really are better off with ours versus Africa's."

    A woman is better off getting carjacked and stranded when compared to the alternative of being raped and left in a ditch.

  • Cytotoxic||

    Well...yeah.

  • The Derider||

    Not just that, but a bureaucracy that can process a land deed in days is significantly better than one that takes months to process it.

    A legal system where the costs of enforcing a contract are 25% of the value of the contract are significantly better than those where the cost of contract enforcement exceeds 100%.

    I mean, you're not some anarchist or something, right?

  • Registration At Last!||

    Saying poverty is our natural state is a little misleading. A stone-age 'uncivilized' person and a modern slum-dweller may both be impoverished, but they couldn't be more differently situated.

    The world has many, many people in poverty, but almost none of them are in a 'natural' impoverished state.

  • Cytotoxic||

    Yes. The slum dweller is certainly better situated to better himself.

  • Registration At Last!||

    Gee, I wonder why everybody thinks you people are insufferably smug, glib, and self-satisfied. It must be them, right? It couldn't be you, right?

    Maybe it's you.

  • Cytotoxic||

    I accept your surrender and apology with magnanimosity and grace.

  • Registration At Last!||

    Doubling-down on the smugness. I love it.

    Can't wait to see what your LP candidate Gary Johnson pulls in the election. I think he's a stand-up guy, and without people like you hung around his neck, I'd give him a chance at a solid 10%.

    But by the time you wall-eyed mouth-breathers are done showing your "true colors" as his "base," he'll drop down below 2% like all the others. I don't know why more than half of all self-identified Libertarians have Asperger-level disorders that make them socially noxious, but they do.

    People like you are a dead-weight handicap for anybody trying to do practical work in the advancement of human liberty. Sad irony.

  • ||

    Because believing everybody born below the U.S. poverty line is incapable of possessing the motivation, determination, and means to increase their standards of living isn't?

  • The Derider||

    Believing that everybody born below the poverty line stays there because of a lack of motivation and determination is certainly smug.

  • Pip from the forge||

    Gee, I wonder why everybody thinks you people are insufferably smug, glib, and self-satisfied.

    Hi Mary!*
    .
    .
    .
    .
    .
    *I just wanted to say it. Why should "Episiarch" have all the fun?

  • BakedPenguin||

    Mary, Mary, why you buggin'?

    Seriously, fuck off already.

  • Registration At Last!||

    Me go away?

    What are the chances, Baked?

    How about "none." Does "none" work for you? You think I'm gonna get bounced off the board again?

    I'm here to stay. So deal.

  • Mike M.||

    Mary, Mary, quite contrary, trim that pussy, it's so damn hairy!

  • Pro Libertate||

    More wealth. More science, technology, and innovation.

    Oh, yes, and more freedom.

  • JW||

    More wealth

    Redistributed? Done.

    More science, technology, and innovation.

    Our masters already gave you the Chevy Volt, the car that no one wants. What more do you want from them?

    Oh, yes, and more freedom

    You do mean the freedom to be free from freedom, correct?

  • Pro Libertate||

    You mock my pain!

  • JW||

    It's what I do.

  • juris imprudent||

    He is no one to be trifled with.

  • ||

    Pfft, that's easy. The answer to poverty is for everyone to make more money. I don't know why nobody has ever thought of this before.

  • Night Elf Mohawk||

    That's exactly backwards. If everyone makes more money, the rich will make even more and increase the wealth disparity. Even if everyone on the planet had sufficient food, clothing, shelter, electronics, and internet access, some people won't have an Italian supercar and thus will be in poverty.

  • sarcasmic||

    Poverty is indeed relative. It's all about how you feel.

    If you feel like you're in poverty because someone else has more stuff than you, then by golly you're a pauper!

  • Rhino||

    Shouldn't the definition of poverty be the state of being in which you are incapable of providing the things you NEED rather than the things you WANT. If WANT is the standard, than everyone is in poverty because no one has everything they could ever want. I could have an Italian super car, but i really want two. oh the poverty!

  • Mr. FIFY||

    My plan, again, Gojira:

    1. Everyone - man, woman, child, baker, bank president, The President, the lowliest chimney sweep, Andy Dick's cadre of cabana boys, and the Soup Nazi - gets a set wage of $250K. *No exceptions*.

    2. Everyone - see list above - gets taxed half their income, because now everyone is in the Evil Top One Percent bracket.

    3. Steal underpants.

    4. ???

    5. Profit!

  • juris imprudent||

    Andy Dick's cadre of cabana boys

    I blacked out at that point, was there something more you said?

  • Mr. FIFY||

    Just trying to get Tony riled up. Sorry if I caused you gastric distress on to of the blackout.

  • SugarFree||

    Global minimum wage. Ends poverty and out-sourcing in one fell swoop.

  • sarcasmic||

    More like a swell foop.

  • SugarFree||

    That's sort of clever for a comment so devoid of substance.

  • sarcasmic||

    I'd think a librarian would catch the Piers Anthony reference.

  • SugarFree||

    I would think a HitandRun regular would recognize a Tulpa-mocking insult.

  • sarcasmic||

    Assertions without links are meaningless.

  • sarcasmic||

    Assertions without links are meaningless.

  • sarcasmic||

    Three o'clock squirrels are right on time.

  • BakedPenguin||

    Excellent! Also, a large UN bureaucracy to enforce it.

  • califernian||

    with guns of course.

  • BelowTheRim||

    One world government eh, Sugar.

    Less free = less poverty to you I guess.

    I really hope you are reverse trolling or something bc your above statement is bright as a tropical storm.

  • SugarFree||

    When I have to use a sarc tag, the terrorists have truly won.

  • R C Dean||

    I thought "SugarFree" was a sarc tag.

  • SugarFree||

    Some people just won't accept ad hoc signifiers.

  • Pip from the forge||

    I thought it was a laxative.

  • JW||

    I thought it was what comes after a Rusty Venture.

  • Drake||

    Institutions don't just spring up, they are a product of a culture. I work for an institution dedicated to helping people and increasing wealth. If I, and every other employee stole from the place at every opportunity, used violence, deceit, etc..., the company would quickly go bankrupt.

    Institutions in the Third World generally suck because the cultures suck.

  • The Derider||

    Culture and institutions are coproductive.

    Part of the reason you don't embezzle, defraud, and assault people is because those activities are punished by our legal system. Our institutions and our culture work towards the same end.

    I think the opposite process happens in many 3rd world countries.

  • Drake||

    Obviously they are interconnected, therefore "institutions" isn't an adequate one-word answer to poverty.

  • The Derider||

    I'm not sure who's claiming that it is?

    I'm saying that Institutions and Culture aren't like the Chicken and the Egg. One didn't proceed the other. They evolved together.

  • Drake||

    Second paragraph of the article.

  • Mike M.||

    But what is it exactly that causes cultures to rise and fall? How is it that Europe goes from the Dark Ages to the Enlightenment and then proceeds to go back into decline?

  • Rhino||

    in the article he talks about violence. The threat of violence makes people give up their liberty in exchange for the protection of the Elite from violence. We allow fear to overcome our rational self interest and slip back into extractionary institutions.

  • The Derider||

    Or China to become the world's technological powerhouse, and then to stagnate for a millennium.

  • Mr. FIFY||

    Oh, there will be violence... on a massive scale... and it will be fueled by the leftists.

  • themoralfelon||

    Culture, institutions, AND individuals are coproductive and coevolving. Without individuals desiring something beyond the status quo, there is no impetus for cultural and institutional evolution. Likewise, culture influences the evolution of the individual (worldviews, perceptions, etc.).

  • The Derider||

    I agree, individual human motivation is a big part of the picture.

    Also, environment, geography, and technology.

  • Mr. FIFY||

    Did it ever occur to you, Derider, that a lot of people don't embezzle, defraud, or assault others because they're just not into doing shit like that?

  • ||

    No Tony on this thread? Where are all the accusations of 'wealth apologist!' and assertions that profits are not legitimate?

    Speaking of where is someone, where is Groovus? He was so looking forward to the SC knocking down obamacare...and now he has disappeared.

  • Brutus||

    He's being fit for his saddle and bit by Kathy Sebelius.

  • ||

  • ||

    Beat me to the punch. Looks like about half the July issue is composed of weeks-old HampersandR pieces.

  • Mr. FIFY||

    Here's the cure for abject poverty:

    Stop subsidizing it.

    This ain't newcular rocket surgery.

  • PandyGandi||

    Time to kick it on up a notch I think. Wow.

    www.Global-Privacy.tk

  • ||

    Ancient Rome had slave power, Imperial China had strict limits on domestic and foreign commerce, Russia had serfdom, India had hereditary castes, the Ottoman Empire had tax farming, Spanish colonies had indigenous labor levies, sub-Saharan Africa had slavery, the American South had slave labor and later a form of racial apartheid, and http://www.maillotfr.com/maill.....-3_10.html the Soviet Union had collectivized labor and capital. The details of extraction differed, but the institutions were organized chiefly to benefit elites

  • Nike air max womens||

    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. Ancient Rome had slave power, Imperial China had strict limits on domestic and foreign commerce, Russia had serfdom, India had hereditary castes, the Ottoman Empire had tax farming, Spanish colonies had indigenous labor levies, sub-Saharan Africa had slavery, the American South had slave labor and later a form of racial apartheid, and the Soviet Union had collectivized labor and capital. The details of extraction differed, but the institutions were organized chiefly to benefit elites.

  • 4thaugust1932||

    Economic_mobility != Social_mobility.
    http://wh.gov/0vth

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