Why Nations Fail - Acemoglu and Robinson

Why Nations Fail - Daren Acemoglu and James Robinson on the origins of power, prosperity and poverty

The engines of power, prosperity and poverty

I’ve now twice read Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daren Acemoglu and James Robinson. Using an institution-centric model, Acemoglu and Robinson tackle the ambitious task of explaining why some countries prosper when others do not.

On my first reading, I had dismissed the book rather hastily. I felt their framework too simple to explain the complex dynamics and histories of nations. I wasn’t alone on this. For example, Bill Gates thought the book was too “vague and simplistic”, “a major disappointment” to him (which also sparked quite the response from the two authors).

But on reflection, some twelve months later, I realised that my conclusion too was oversimplified. Sometimes, it’s the basic principles that best explain the tendencies of complex systems. What Acemoglu and Robinson (A&R) offer is a starting point and framework to think about progress and poverty.

So, I decided to revisit A&R’s book with wider eyes this time. And in this post, we’ll look at some of the key lessons that I took from Why Nations Fail.

Inclusive and extractive institutions

Societies construct economic, cultural and political rules to function. And the way we organise ourselves and distribute power has important implications for our trajectory and progress as a whole. A&R’s thesis is that inclusive economic and political institutions tend to lead to economic growth and prosperity, while extractive institutions tend to lead to poverty and stagnation.

Pluralism and centralisation

There are two axes in A&R’s framework of political institutions. First is the authors’ distinction between absolutist political institutions that have “narrow and unconstrained” power, and pluralistic political institutions, where power is distributed broadly. Second is their contrast between decentralised and centralised political institutions, the degree to which the state can “enforce law and order, … provide public services, … and regulate economic activity”.

A&R define inclusive institutions as those that are both pluralistic and centralised, and institutions that are absolutist and/or decentralised as extractive. The authors argue that pluralism and centralisation are necessary for inclusive and effective political institutions. Pluralism minimises the misuse of power, while centralisation enables greater coordination, planning and allocation of resources.

A fair playing field

Inclusive economic institutions are those that give its population the freedom and incentives to participate in economic activity. Common features of inclusive economic institutions include “secure private property, unbiased rule of law, and… a level playing field” (e.g. free entry for new business). This includes governments that are able to maintain law and order, enforce contracts and deliver public goods. By contrast, insecure property rights, expropriation, slavery, serfdom, state-controlled media and monopolies (in which only the elite benefit) are common markers of extractive institutions.

The authors argue that inclusive economic institutions are the “engines of prosperity”, the wellspring in which education, technology and capital markets can flourish. And the more extractive a nation’s institutions are, the less sustainable their progress will be over the long run.

Note that A&R’s framework is not a binary description. Institutions are not inclusive or extractive per say. Rather, their attributes rest on a spectrum. Some nations that are inclusive within their borders may run extractive regimes outside. Likewise, institutions that are inclusive to some subset of the population might remain inaccessible to others.

Institutions, innovation and incentives

Innovation is crucial to long-run per capita progress. There are limits to our productive capacity without finding new and better ways to produce. And people are unlikely to learn and innovate if they cannot enjoy the emotional and economic benefit of their work. You cannot coerce innovation and productivity out of people indefinitely.

Unfortunately, this is what extractive institutions tend to do. Controlling elites have incentive to preserve their power. And so political and economic institutions with narrow and unconstrained powers tend to block innovations that they perceive as threats. This often comes at a great direct or opportunity cost for the wider population.

For example, A&R describes how the aristocrats of the Hungarian and Russian empires blocked industrialisation in fear of its consequences. Likewise, the sultans and religious bodies of the Ottoman Empire banned the printing press, fearing its impact on the spread of ideas and their political control (less than 3 percent of their citizens were literate at the time). Their nations lagged behind the rest of industrialised Europe by the 19^th Century.

That’s not to say that extractive economic and political institutions cannot grow. They can, particularly if those in control are effective allocators of labour and capital. But is it reasonable to expect each successive regime to govern with benevolence, restraint and effectiveness? A&R don’t believe that such institutional models are sustainable in the long-run due to the incentives that underpin them.

Virtuous and vicious cycles

A&R discuss how the ‘choice’ of organisation can exhibit its own inertia and feedback loop. There are vituous cycles. This refers to the tendency of inclusive institutions to become even more inclusive over time. For example, the authors detail how the rule of law and free press can promote a fairer playing field, and dampen extractive activity. This in turn allows other engines of progress, like business ventures and capital markets, to flourish.

Then there are vicious cycles, or the tendency for extractive institutions to become even more extractive. Extractive institutions can incite infighting, revolutions and civil wars. And this unrest can further destabilise its institutions, fuelling the cycle even further. Here, the authors cite Robert Michel’s iron law of oligarchy and the tendency for nations to replace one extractive institution with another. The fall of ancient Rome is a classic case study on this.

Critical junctures

Related to feedback loops is the idea of critical junctures. These are important events, from disease to revolutions, that test or transform the foundations of institutions. Some junctures may rest power away from the narrow elite and allow institutions to transition towards inclusivity. Other junctures may destabilise the foundations, leading to degeneration in the nation’s inclusiveness. Critical junctures may amplify, dampen or reverse the feedback loops in virtuous and vicious cycles.

Path deterministic

It’s difficult to predict the consequences of a critical juncture. While the institutions that exist beforehand will influence a nation’s response to critical junctures, contingency will play a major role. The diversity we see in social and ecological systems over time are clear examples of this. A&R warns readers about the dangers of intepreting history as inevitable. Like winning the lottery, just because something happened doesn’t make it the most likely thing to have happened.

“Small differences and contingency are not just part of our theory; they are part of the shape of history”.
Daren Acemoglu and James Robinson Why Nations Fail, 2012.

Institutional drift

Starting conditions and small differences matter because their results compound over time. This can lead to large divergences between nations, which A&R refer to as an institutional drift. The idea shares some parallels with that of evolutionary and ecological processes. That is, how cumulative selection can lead to complexity, diversity and divergences over time. (Although we should be careful not to draw too literally from such analogies)

Diamond’s hypothesis

A&R believe that other common explanations, like geography and cultural factors, are inadequate in describing the rise and fall of nations, especially after the Industrial Revolution (1760-1840). For example, they describe how Jared Diamond’s geographic hypothesis is unable to explain the diffusion of technologies and distribution of incomes in regions such as the two halves of Nogales, or South and North Korea today.

Here, I disagree somewhat with A&R. For every example that show that geography and initial endowments don’t have explanatory power, we can find examples where they do (as with Jared Diamond’s work). On the idea of culture, I also find it interesting that A&R say that “there is little relationship between religion and economic success”. One might argue that religions of the past were quasi-political institutions. It’s another model for social organisation; constructs to organise attitudes, incentives, and hierarchies. Some of its ideas and values remain seeded in the political and legal institutions of today.

So, I prefer to take a broader view on the explanatory variables of progress. And to recognise the role of geography, contingency and pre-history when they matter. Disease, climate, soil productivity and scarce resources have impacted different nations in different ways. And while our institutions shape us today, they’re also the product of happenstance, history and nature itself. We might have a more fruitful model if we mix and match the ideas of Acemoglu, Robinson, Diamond, and so on. Each one offers a different starting point to think about our world. It’s a mighty endeavour to understand the complex web of interactions. No single explanatory variable or framework is likely to suffice.

Neighbours

Another important idea in Why Nations Fail, although not explicit, is the consequence of neighbour interactions. Here, I mean neighbours in a geographic, economic and/or cultural sense. We can find examples across history where neighbours become stabilisers or destabilisers of institutions. The Spanish colonial conquests in the Americas, or two millennia of geopolitics in the Middle East, have had trajectory altering consequences for those regions. History shows how competition and cooperation can alter the incentives and choices of institutions. So, geopolitics and international relations complicates our narrative quite a bit. It’s also a key tenet in Jared Diamond’s Collapse: How Societies Choose to Fail or Succeed.

Voyaging to inclusivity

Some nations do transition towards inclusive institutions over time, often through the immense struggles, sacrifice and contingency. For example, A&R traces the history of the United States, describing how they overcame elite-controlled power to distribute political rights more broadly; and established a centralised government that was more responsive and accountable to their citizens. But the socioeconomic challenges of today, both in the United States and across the world, reveal the spectrum of progress and the long winding road to inclusivity.

Empowering a broad coalition

So how do nations transition from extractive to inclusive institutions? Here, A&R doesn’t have a clear answer. And fairly so. If the science of organisation was obvious, we wouldn’t have domestic or international problems in the first place.

But the authors offer some common themes from history. For example, they attribute the progress in England following the Glorious Revolution, and France following the French Revolution, to the: (1) arrival of merchants with incentives to innovate; (2) formation of a broad governing coalition, which reduced the incentive for and strength of narrow political control; (3) prior regimes that were conducive to inclusivity (i.e. England’s Magna Carta and France’s Assembly of Notables); and (4) luck.

Amongst the many ingredients of progress, we also shouldn’t understate the importance of psychological empowerment, both of the people and the coalitions that represent them. A&R describe how it can help a population to resist extractive pressures. Economic and political pluralism, and psychological empowerment, go hand in hand.

Leaks in the great ship

The virtuous cycle means that pluralistic institutions, once established, make it more difficult for the narrow ‘elites’ to usurp control. I’m reminded of the Pentagon Papers and Watergate, and the role of the Supreme Court and Washington Post during these critical junctures. Nations require checks and balances to withstand the pressures of extractive forces. When one domain begins to falter, then the others are drawn upon to restore integrity and inclusiveness.

Growth and prosperity are not guaranteed geometric processes in time. A&R described how Argentina, Russia and parts of South East Asia enjoyed periods of rapid economic growth prior to stagnation or reversal. The rise and fall of the Roman Empire is another important example. These are stark warnings for the United States and China today. The model we select for organisation, incentives, redistribution and sustainability is central to our long run progress. So, we must continue to scrutinise the utility and inclusiveness of our institutions.

Finally, I’m reminded of Niall Ferguson’s metaphor in The Great Degeneration, in which he likens lawmaking and institutional development to a slow-moving landscape. That is, a historical process that each generation will get to terraform. It’s a reminder that our economic and political institutions today are more fragile than we’d like to think. They can erode over time, and are not yet inclusive or accessible for everyone either. As Benjamin Franklin once said, “a small leak will sink a great ship”. Complacency breeds degeneration. There’s a lot more progress for us to make.

References

Acemoglu, D., & Robinson, J. (2012). Why Nations Fail: The Origins of Power, Prosperity and Poverty.
Ferguson, N. (2012). The Great Degeneration: How Institutions Decay and Economies Die.
Diamond, J. (2005). Collapse: How Societies Choose to Fail or Succeed

Why Nations Fail — Acemoglu and Robinson on Power, Prosperity, and Poverty