Why Nations Fail

"Why Nations Fail is by two of my favourite economists, two very close friends and co-authors of mine, Daron Acemoglu and James Robinson. They’re tackling a subject that I’ve worked on with them, and they do a great job of bringing it to life and making it vivid. Why Nations Fail is like Jared Diamond’s Guns, Germs, and Steel – which I didn’t mention because it’s such an obviously famous book – one of those books that stretches your mind and gives you all these examples and connections between them, so that you come away from it saying, “Wow. I didn’t know that.” It’s really, really interesting. By the way, it turns out they’re even better on Twitter than they are on their blog. So, there’s no limits to the genres these guys can master. Yes, I have not exactly a beef, but a constructive dialogue going, particularly with Daron, about whether or not the US is already in a period of having, in their language, more “extractive” institutions and less inclusive ones. I recognise there is a big gap between the US and, say, Sierra Leone or Haiti, or whichever troubled country you want to pick from the book. But – and this is going back to Teddy Roosevelt – I fear that we have let the concentration of economic, financial and political power go too far. This is really bad for democracy and for the opportunities of most people in this country, and it’s exactly the kind of thing they mean by extractive institutions. Get the weekly Five Books newsletter I don’t know if you saw it, but Matthew Yglesias gave a wonderful and hilarious review of Why Nations Fail , in which he compared it to The Hunger Games . His point is that the dystopian view of the world, which is rather chillingly and vividly portrayed in The Hunger Games , is not that far from things we’ve seen in history and things we see around the world today. It’s actually a very extreme form of extractive institutions in which a few people live very well and most people live in squalor. You could say, been there, done that – not for the US, but for many countries. So could the US go down that path? Is our democracy forever? Are our institutions so strong that we have republic-long immunity from those problems? I don’t think so. Ben Franklin was accosted by a stranger upon leaving the constitutional convention in Philadelphia in 1787. She asked him, “Well, Doctor, what have we got – a republic or a monarchy?” And Franklin said, “A republic, if you can keep it.” I would say I’m more of a realist, but yes, they would say I’m more pessimistic. Their experience with this book has been like our experience with some of the papers we did together, which is that, at some level, people on the right and the left like the thesis. People on the right say, “Aha! You mean that you don’t have secure property rights!” which is exactly what part of the message is. People on the left say, “Aha! A few people have too much power in society” which again is part of the message. At that level it’s not controversial – in fact it’s an unusual book in that it appeals to people across a broad spectrum. However, when you start talking about a particular country, say the US, becoming more extractive in this or that specific way – and I would say the Paul Ryan budget will push us towards a more extractive society – then of course people find that amongst the most controversial things you can say in American politics today. I haven’t been accused of not being a patriot, but I have been accused of lots of other things that aren’t fit for public consumption. Though when you write a book and start blogging you become a bit immune to that kind of thing."

"The key to this book is really all in an early example in the text, where they cite the small town of Nogales on the Arizona-Mexico border. The border basically goes through the middle of the town: you can drive a cigarette paper through the differences between the people on the two sides of the border. They’re from similar families, they’re related, they have shared history and so on, but one of them is in North America, and the other is in Mexico. There are visible and quite stark contrasts in the standards of living and prosperity of people who live either side of the border. The question they ask is, how did this happen? This leads them to an issue which crops up in Ian Morris’s book as well, and I think is an absolutely essential factor to look at when we try to understand relative speeds and levels of economic development, which is the role of inclusive institutions. “What if the Spaniards originally, many, many hundreds of years ago, had actually gone to North America? How would that have changed the course of human development on that side of the Atlantic?” This is not something that is necessarily taught in Economics 101. If you go through a standard graduate degree in economics, you don’t do very much other than mathematical economics and micro, and some applied economics. In this academic tradition, the role of institutions and the role they have played historically gets pretty short shrift. This may be changing, as the way that economics is taught at undergraduate level is re-evaluated. But the role of institutions is really important for societal development. Another example that James Robinson and Daron Acemoğlu raise in the book—an issue others have raised as well—is a hypothetical one: What might have happened if Christopher Columbus had landed in another part of America? What if the Spaniards originally, many, many hundreds of years ago, had actually gone to North America? How would that have changed the course of human development on that side of the Atlantic? It’s a hypothetical question so you can’t really answer it. But it emphasises, I think, that there’s only so much you can do by deploying labour and capital accumulation. Once you’ve reached the physical limits of exploitation of the resources that you have to hand, you have to do something else. So what you are really interested in trying to improve is the quality of labour and the quality of capital — which is about skills, education, management, innovation and science and all of the things that make the whole bigger than the sum of the parts. The role of institutions—whether they’re competition institutions, or regulatory institutions, or government institutions or educational institutions—is of huge significance. I think it’s maybe that non-inclusive political systems either can’t retain or can’t sustain it. This is a very trenchant part of the modern debate, particularly in the wake of the financial crisis of 2008. People now talk about the Washington consensus versus the Beijing consensus, or the free market view about how domestic and international institutions function verus the role of state institutions and a bigger role for government in the economy. These ideas permeate the veins of political debate in all Western elections in one shape or another. So, yes, I think the emphasis on inclusive institutions is really important. “We’re not necessarily saying that Western democracy is the only form of political organisation which can achieve economic success.” We’ve seen examples of what happens with exclusive or dictatorial type regimes — whether you’re talking about the dictatorship of the Communist Party in the USSR, or about Venezuela, or Brazil under military rule. If you look around the OECD, there really aren’t any examples of societies that have achieved the status of that prosperous group by having exclusive institutions, or institutions that are dominated by a particular class or a particular individual. There are some grey areas. If you look, for example, at Singapore, it’s not a member of the OECD but it is obviously a very rich country or city state. If you look at Japan or South Korea, we assume and naturally take these as examples of countries that have democratic forms of government and inclusive institutions. But aficionados may actually say, ‘Yes, but…’: Although they have had democratising reforms and institutional changes and so on, they were, for very, very long periods of time, one-party states. They may have elections, but in Japan, for example, because of the dominance of the Liberal Democratic Party, you could argue it still pretty much is a one-party state, even though there are smaller political parties as well. Get the weekly Five Books newsletter So there is room for debate. We’re not necessarily saying that Western democracy is the only form of political organisation which can achieve economic success. But it does set out, I think, a model of inclusivity, which others have sought to emulate in their own different way, and is very different from the USSR, or even modern Russia, and certainly China today. Those distinctions certainly do hold."

"In terms of understanding this top inequality, I mentioned the possibility that it might be about politics. How should we think about politics? What are the levers of politics? For that we need a conceptual framework and that’s what this book tries to provide. It’s co-authored with my long-term collaborator and friend Jim Robinson – and it’s not about US or UK or Canadian inequality. It runs through several thousand years of history, and tries to explain how societies work and why, often, they fail to generate prosperity for their citizens. It’s a very political story. At the centre of our framework is the tension between people who have political power and how they can use that power for their own interests and against the interests of the rest of the society. We don’t live in a zero-sum world – and there is a lot of prosperity-creating capability that many societies have exploited – but there are also some zero-sum aspects. Often there will be tensions within society, about who is going to get the biggest slice, and people will try to manipulate the entire fabric of our institutions in order to get that slice. So that’s the narrative we develop for understanding how societies have developed their institutions. The absolutist institutions created a very unequal distribution of political power and a very unequal distribution of economic gains in society and the two became synergistic – the very unequal distribution of political power locked in a very unequal distribution of economics gains. This created a vicious circle, but the conflict it engendered sometimes led to a breaking down of the institutions that this unequal distribution depended on, opening the way for more open institutions, which are one of the engines of prosperity. The last part of the book is the converse story, which is how these inclusive institutions, which create a more equitable distribution of political power and so a more level playing field, are going to be constantly challenged. These inclusive institutions don’t guarantee that everything is going to be equally distributed but will at least prevent the most egregious and unfair distribution of resources. They also ensure a more equal distribution of political power in society. But there is no guarantee that they will last for ever. If you are able to garner a little more support, and a little more political power, the danger that you can start tweaking these institutions to your benefit is always present. There are continuous challenges to the inclusive nature of political institutions. So in this framework you can see the threat of the increased inequality in the US as a symptom of the sorts of challenges to the fairly inclusive set of institutions that the US has had for over 200 years. No, and we give examples of how other societies have seen about-faces in their institutions. For example, Venice. It started with unparalleled inclusive institutions for its time, and then went through a process whereby these institutions became more and more controlled by a smaller clique and ultimately reversed the progress that Venice had made. Oh yes. I never thought that that was a very controversial point of view, but it is, I know. We are conditioned to think of factors such as culture and geography as so determining because we see them as immutable. They’re there and therefore they must be important. How could it not be important that Mexico City is so much warmer than New York? How could it not be important that some people are Muslim and others are Christian? But actually none of it is really as obvious as it appears. In early chapters, we document how many parts of the world that are very prosperous today were relatively backward at the time Europeans arrived to colonise them. Yet places like Mexico or Peru were then among the most civilised and developed. It was the set of political and economics institutions that were differentially imposed on these places that led to a reversal and a divergence. The same thing is true for cultural and religious values. The association between these and economic outcomes has not been immutable. Often they are consequences of the different political histories that these places have endured. There are three different concepts here. One is equality of political power. The second is equality of opportunity, and the third is equality of economic outcome. It would be a very inefficient society if we imposed equality of economic outcomes, because the engines that create prosperity do require individuals to have property rights, to have incentives, so that they put in effort, work hard and invest. That will inevitably be associated with inequality, but if you try to stop that inequality it will create lots of inefficiencies and probably choke prosperity. To give you an example, taxing software entrepreneurs would definitely not be the best way of trying to encourage the technological leadership that the US has. But it’s different when you’re talking about equality of opportunity. If you don’t have equality of opportunity, it’s going to create not only an unfair society but also one that doesn’t deploy its resources in the best way. Going back to the software example, if you want to increase the technological ingenuity of the US, what you want to do is to provide a platform that gives an opportunity for the best minds to actually be able to choose the occupation that they want. And when that’s software, that’s going to create better innovations in software. Even more important is equality of political power. When political power is very unequally distributed, it will inevitably be the case that those who have the political power will start using it to create a non-level playing field for themselves. They will try to use that political power to dispossess the rest and grab stuff that benefits them and harms society. I am totally comfortable, from a personal point of view, with economic inequality emerging if that really reflects the different social contributions that individuals make. It’s a price that we pay for providing incentives for people to contribute to prosperity. But there is one caveat to that. If, in the end, income becomes very unequal, even if it’s for good reasons, it might create dynamic problems, because those who have become very rich now control so much of the resources of society that they might start using those resources for creating an unequal distribution of political power."