Book Reviews

The Cure for Abject Poverty

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

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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.

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. What looks like corruption in places like Russia or Mexico is really just the more or less normal distribution of largess through patron-client networks. Social peace and monopoly extraction are 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 his 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 nomenclature of Acemoglu and Robinson, inclusive institutions are then created. Economic and political competition (creative destruction) produces a virtuous circle by making it difficult for would-be elites to re-establish themselves.

Whereas Acemoglu and Robinson stress historical contingency in their analysis, North et al. operate at a higher level of abstraction. Their analysis identifies three "doorstep conditions" that enable the development of open access orders: 1) the rule of law for elites; 2) perpetually lived forms of public and private elite organizations, including the state itself; and 3) consolidated political control of the military. Essentially the state becomes depersonalized, no longer depending on the operation of patron-client networks. 

What is crucial is that the steps toward an open access order must be in the interests of the elites. For example, expanding the rule of law to nonelites gives elite members greater opportunities to engage in profitable transactions. The existence of these "doorstep conditions" does not guarantee a transition from a natural state to open access, but North et al. persuasively argue that such a transition will not happen without them. The insight that all human societies before 200 or 300 years ago have been organized as patron-client networks helps clarify the historical processes identified by Acemoglu and Robinson.

It's probably unfair to take the authors to task for not looking at an issue that is arguably outside the scope of their analysis, but the reader is left wondering: Can the virtuous circle of inclusive institutions spin out of control? Never mind reactionary elites; is it possible for reactionary populaces to kill off innovation and stifle economic growth? Creative destruction, after all, does not just destabilize the economic prospects of elites. Acemoglu and Robinson cite the Luddites in Britain, who destroyed mechanical weaving machines in the early 19th century as a threat to their livelihoods. 

In his 2002 book The Gifts of Athena: The Historical Origins of the Knowledge Economy, Northwestern University economist Joel Mokyr noted, "Technological progress inevitably involves losers, and these losers…tend to be concentrated and usually find it easy to organize." He added, "Sooner or later in any society the progress of technology will grind to a halt because the forces that used to support innovation become vested interests. In a purely dialectical fashion, technological progress creates the very forces that eventually destroy it." In order to forestall this possibility, political institutions must surely be inclusive, but they must also be limited in scope.

Now that the institutions that are required to raise people out of natural abject poverty have been identified, is there anything that can be done to push along their development? Not much. "You can't engineer prosperity," Acemoglu and Robinson flatly assert. They reject the notion that the process of modernization leads ineluctably toward open institutions, pointing out that growth fueled by abundant resources has not produced inclusive institutions in places like Venezuela or Saudi Arabia. Hundreds of billions of dollars in foreign aid have been showered on extractive elites in poor countries, with almost no effect on poverty. Development economists' efforts to enlighten rulers about proper economic and political policies will do no good, since those leaders understand that implementing such policies would undermine their power.

Assuming that a country meets the doorstep conditions identified by North and his colleagues, empowering broad coalitions of citizens is the only process that has led to the development of inclusive institutions. How can that be accomplished? "The honest answer of course is that there is no recipe for building such institutions," conclude Acemoglu and Robinson. They do hold out a faint hope that the spread of media and information technology will enable people to more easily form the pluralistic coalitions that can eventually generate inclusive political and economic institutions. Information technology might also produce a kind of demonstration effect by showing people how inclusive institutions operate.

Acemoglu and Robinson have convincingly identified the cure for poverty, but no one has yet figured out how to get the patient to take his medicine. 

Science Correspondent Ronald Bailey is the author of Liberation Biology (Prometheus).