• THIS BOOK IS about the huge differences in incomes and standards of living that separate the rich countries of the world, such as the United States, Great Britain, and Germany, from the poor, such as those in sub-Saharan Africa, Central America, and South Asia.
• One might think that the fact that world inequality is so huge and consequential and has such sharply drawn patterns would mean that it would have a well-accepted explanation. Not so.
• Of course, our theory is all about how nations can take steps toward prosperity—by transforming their institutions from extractive to inclusive.
• The differences between the United States and Mexico are in turn small compared with those across the entire globe. The average citizen of the United States is seven times as prosperous as the average Mexican and more than ten times as the resident of Peru or Central America. She is about twenty times as prosperous as the average inhabitant of sub-Saharan Africa, and almost forty times as those living in the poorest African countries such as Mali, Ethiopia, and Sierra Leone. And it’s not just the United States. There is a small but growing group of rich countries—mostly in Europe and North America, joined by Australia, Japan, New Zealand, Singapore, South Korea, and Taiwan—whose citizens enjoy very different lives from those of the inhabitants of the rest of the globe. The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is simple; it is because of the very different institutions on the two sides of the border, which create very different incentives for the inhabitants of Nogales, Arizona, versus Nogales, Sonora.
• This book will show that while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.
• World inequality, however, cannot be explained by climate or diseases, or any version of the geography hypothesis.
• WE WILL ARGUE that to understand world inequality we have to understand why some societies are organized in very inefficient and socially undesirable ways. Most economists and policymakers have focused on “getting it right,” while what is really needed is an explanation for why poor nations “get it wrong.”
• …achieving prosperity depends on solving some basic political problems.
• …the failure of nations today is heavily influenced by their institutional histories, how much policy advice is informed by incorrect hypotheses and is potentially misleading, and how nations are still able to seize critical junctures and break the mold to reform their institutions and embark upon a path to greater prosperity.
• The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy.
Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty
So many books…so little time.
This week, I presented my synopsis of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. Published in 2012, it’s been on my reading list for…close to a decade. But, because it was our October selection for the Urban Engagement Book Club, sponsored by CitySquare, I finally had to read it. And, to put it mildly, I am glad I did.
The book is exactly what the title says: it describes why nations fail. Meaning, why some nations have so much poverty for the many.
The book has one very strong premise, and that premise is this: I called this the point of the book: What is the point? When a government is set up to include people and spread possibility, through effective and inclusive political and economic institutions, people will be lifted from poverty to prosperity. There is no other way…
As always in my synopses, I ask why is this book worth our time? Here are my three reasons for this book.
#1 – This book is a history of many nations that are poor and stayed poor; and some nations that rose out of poverty for the many to economic prosperity for the many.
#2 – This book provides a history of the bad ideas – (of how not to do it) – on how to fail at lifting people out of poverty.
#3 – This book is a reminder that some of our beliefs and practices throughout parts of American history served too many of our people quite badly; especially people of color. There is still much work to be done.
In my synopses, I always include a few pages of Quotes and Excerpts from the book; the “best of” Randy’s highlighted Passages. Here are a number of the best of the best from this book:
• When they reason about why a country such as Egypt is poor, most academics and commentators emphasize completely different factors. …by its geography.
• The notion that the rulers of Egypt simply don’t know what is needed to make their country prosperous, and have followed incorrect policies and strategies in the past.
• In this book we’ll argue that the Egyptians in Tahrir Square, not most academics and commentators, have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people.
• The losers have been the Egyptian people, as they only too well understand.
We’ll show that this interpretation of Egyptian poverty, the people’s interpretation, turns out to provide a general explanation for why poor countries are poor. …Egypt has had revolutions in the past that did not change things, because those who mounted the revolutions simply took over the reins from those they’d deposed and re-created a similar system.
• Why are the institutions of the United States so much more conducive to economic success than those of Mexico or, for that matter, the rest of Latin America? …The answer to this question lies in the way the different societies formed during the early colonial period.
• Though these institutions generated a lot of wealth for the Spanish Crown and made the conquistadors and their descendants very rich, they also turned Latin America into the most unequal continent in the world and sapped much of its economic potential.
• A TALE OF TWO CONSTITUTIONS It should now be apparent that it is not a coincidence that the United States, and not Mexico, adopted and enforced a constitution that espoused democratic principles, created limitations on the use of political power, and distributed that power broadly in society. The document that the delegates sat down to write in Philadelphia in May 1787 was the outcome of a long process initiated by the formation of the General Assembly in Jamestown in 1619.
• The Constitution of the United States did not create a democracy by modern standards. Who could vote in elections was left up to the individual states to determine. While northern states quickly conceded the vote to all white men irrespective of how much income they earned or property they owned, southern states did so only gradually. No state enfranchised women or slaves, and as property and wealth restrictions were lifted on white men, racial franchises explicitly disenfranchising black men were introduced. Slavery, of course, was deemed constitutional when the Constitution of the United States was written in Philadelphia, and the most sordid negotiation concerned the division of the seats in the House of Representatives among the states.
• But selling patents was a good idea only for someone like Thomas Edison, who had ideas faster than he could put them to practice. (He had a world-record 1,093 patents issued to him in the United States and 1,500 worldwide.) The real way to make money from a patent was to start your own business.
• The first country to experience sustained economic growth was England—or Great Britain, usually just Britain, as the union of England, Wales, and Scotland after 1707 is known. English prosperity also spread rapidly to Britain’s “settler colonies” of Canada, Australia, and New Zealand. …Industrialization in England was soon followed by industrialization in most of Western Europe and the United States.
• If you instead make a list of the poorest thirty countries in the world today, you will find almost all of them in sub-Saharan Africa.
• As we will show, poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.
• But growth under extractive institutions differs in nature from growth brought forth by inclusive institutions. Most important, it will be not sustained growth that requires technological change, but rather growth based on existing technologies.
• With a few exceptions, the rich countries of today are those that embarked on the process of industrialization and technological change starting in the nineteenth century, and the poor ones are those that did not.
• Slavery was dominant in the South with some counties, for example, along the Mississippi River having as much as 95 percent of the population slaves.
• The phrase Jim Crow, which supposedly originated from “Jump Jim Crow,” an early-nineteenth-century satire of black people performed by white performers in “blackface,” came to refer to the whole gamut of segregationist legislation that was enacted in the South after 1865. …In the meantime, blacks continued to be excluded from power and repressed.
• …The reason that the economic and political trajectory of the South never changed, even though slavery was abolished and black men were given the right to vote, was because blacks’ political power and economic independence were tenuous.
• The redemption of the South involved the introduction of new poll taxes and literacy tests for voting, which systematically disenfranchised blacks, and often also the poor white population. …The Jim Crow laws created separate, and predictably inferior, schools.
• The vicious circle is based on extractive political institutions creating extractive economic institutions, which in turn support the extractive political institutions, because economic wealth and power buy political power.
• What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics.
• Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can typically do little in this respect. …Recognizing the roots of world inequality and poverty is important precisely so that we do not pin our hopes on false promises.
• Pluralism, the cornerstone of inclusive political institutions, requires political power to be widely held in society, and starting from extractive institutions that vest power in a narrow elite, this requires a process of empowerment. …Once again, the path starting in Virginia, Carolina, Maryland, and Massachusetts and leading up to the Declaration of Independence and to the consolidation of inclusive political institutions in the United States was one of empowerment for increasingly broader segments in society.
In this brief post, I do not have space to recount the many, well-told stories from history from the book about nations that “succeeded,” meaning, nations that created a genuine path for prosperity for the many; or the stories from history of nations that failed, meaning nations that kept far too many in poverty.
But, here are some of the key insights and points made in the book, that explain why this happened:
- Captain John Smith and Jamestown (1607)
- Smith realized that if there were going to be a viable colony, it was the colonists who would have to work.
- “I entreat you rather to send some thirty carpenters, husbandmen, gardeners, fishermen, blacksmiths, masons, and diggers up of trees, roots, well provided, then a thousand of such as we have.”
- The only alternative was to give the settlers incentives. In 1618 the company began the “headright system,” which gave each male settler fifty acres of land and fifty more acres for each member of his family and for all servants that a family could bring to Virginia.
- It was the start of democracy in the United States.
- The only option for an economically viable colony was to create institutions that gave the colonists incentives to invest and to work hard.
- Freedom and incentives – leading to innovation and shared prosperity
- …engine of technological breakthroughs throughout the economy was innovation, spearheaded by new entrepreneurs and businessmen eager to apply their new ideas.
- Just as the United States in the nineteenth century was more democratic politically than almost any other nation in the world at the time, it was also more democratic than others when it came to innovation.
- Bill Gates, like other legendary figures in the information technology industry (such as Paul Allen, Steve Ballmer, Steve Jobs, Larry Page, Sergey Brin, and Jeff Bezos), had immense talent and ambition. But he ultimately responded to incentives. The schooling system in the United States enabled Gates and others like him to acquire a unique set of skills to complement their talents. The economic institutions in the United States enabled these men to start companies with ease, without facing insurmountable barriers. Those institutions also made the financing of their projects feasible. …These entrepreneurs were confident from the beginning that their dream projects could be implemented: they trusted the institutions and the rule of law that these generated and they did not worry about the security of their property rights.
- The biggest of the big ideas in this book:
- We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions.
- Extractive nations – “take”
- Inclusive nations – give (give/provide genuine opportunity)…
- Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society. We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.
- Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education.
- Pluralism also enshrines the notion of the rule of law…
- Inclusive political institutions support and are supported by inclusive economic institutions.
- Inclusive economic institutions remove the most egregious extractive economic relations, such as slavery and serfdom, reduce the importance of monopolies, and create a dynamic economy, all of which reduces the economic benefits that one can secure, at least in the short run, by usurping political power.
- Finally, inclusive political institutions allow a free media to flourish, and a free media often provides information about and mobilizes opposition to threats against inclusive institutions, as it did during the last quarter of the nineteenth century and first quarter of the twentieth century, when the increasing economic domination of the Robber Barons was threatening the essence of inclusive economic institutions in the United States.
- AND…the other big idea – it is system of government that matters. (Putting power – power to build economically successful lives — into the hands of the people themselves).
- Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.
- Fundamentally it is a political transformation of this sort that is required for a poor society to become rich.
- Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.
- The Virtuous Circle vs. The vicious Circle
- THE VIRTUOUS CIRCLE — institutions that encourage prosperity create positive feedback loops that prevent the efforts by elites to undermine them
- THE VICIOUS CIRCLE — institutions that create poverty generate negative feedback loops and endure
And here are my five lessons and takeaways:
#1 – Enriching the few, especially the few that are powerful, is an almost certain way to keep the many in poverty.
#2 – The more a nation intentionally keeps some down in poverty, the more likely that others will also be kept down.
#3 – What was done to people lingers a long time, UNLESS there a disruptive catalyst prompting a turning point. (Think the Black Plague; and, maybe, think the COVID pandemic).
#4 – Without a nation moving from being an extractive nation to being an inclusive nation, the change from poverty to prosperity will not come!
#5 – There are some always waiting in the wings to move the nation back toward extraction; be ever vigilant.
I have read, and presented synopses of, many books that tell specific stories of racism and slavery and the Jim Crow laws and era, and other aspects of poverty: homelessness; hunger; and books that deal with education issues.
But this book is a true big-picture book. What mindset leads to policies, both political and economic, that produce long-term prosperity, or long-term poverty? This book provides an answer that makes sense.
May we all embrace, champion, and nurture inclusion – prosperity for all.