Sam Reviews: Why Nations Fail
This is an above-average book, which I consider damning with faint praise for a pair of Nobel Prize winners. (strictly speaking it's just a Sparkling Economic Sciences Prize In Memory Of Alfred Nobel, etc.) It's also got curious omissions for a book that runs over 500 pages.
Long post warning. 4000 words.
Acemoglu and Robin are well-read in history, having a great many colorful anecdotes and examples to draw on, yet after five hundred pages they can only vaguely conclude that nations fail because of having Bad Institutions and not Good Institutions. Where do Good Institutions come from? Luck, and the influence of pre-existing Good Institutions.
Why Nations Fail (WNF) uses the terms "inclusive institutions" and "extractive institutions"; I shall round these off to Good and Bad because Acemoglu and Robin are defining "inclusive" and "extractive" in a bizarre way that makes the connotations diverge from the denotations. "Inclusive" institutions in this book are those of a state which is strongly centralized and pluralist; "extractive" institutions is everything else lumped together. Spanish colonialism looting gold in Mexico was "extractive", Soviet Russian communism was "extractive", anarchy in Somalia is also "extractive".
A prototype for these Good Institutions is something like liberal-democratic governance, capitalist economy, and a welfare state. A very reasonable moderate opinion for a 2012 book.
There is little actionable policy advice in the book, since the authors don't know how to get Good Institutions. One thing stands out: be open to new blood and new money so the ruling class doesn't get ossified. Going back at least as far as Rome and the novi homines ("new men"), to the more recent term nouveau riche ("new rich"), it's a longstanding social pattern that old money sneers at new money, trying to cling to power and exclude upstarts.
A daring man might extend this to "techbros" as the new money of the 21st century, especially if you read one of the arguments given that the Ottomans declined in part due to suppressing the techbro innovation of their time, that conspiracy-theory-spreading noosphere-polluting garbage social media device, the printing press:
I say that tongue in cheek, but the printing press genuinely did cause a lot of trouble by making it easy for any conspiracy theorist or agitator to spread lies.
With the summary done, let's dig into the book by chapter.
Chapter 1: So Close and Yet So Different
This opens with how the American-Mexican border town of Nogales has a prosperous northern half in Arizona ($30K average annual household income, etc) and a poor southern half in Sonora ($10K). WNF argues that this is because America has Good Institutions while Mexico has Bad Institutions, and the reason for the institutional difference is the difference in colonization history in the northern British and the southern Spanish imperial regions. The book goes on a tour of comparative colonial history.
WNF argues that the border difference shows institutions are what matter, not geography, but I read the book's text as presenting evidence that institutions varied partly for geographical reasons like the distribution of resources. In WNF's own words:
resource-rich countries such as Mexico—or, more appropriately, the elites in such countries—could enrich themselves by exporting raw materials and natural resources to industrializing North America or Western Europe. Díaz and his cronies thus found themselves in a different and rapidly evolving world. They realized that Mexico had to change, too. But this didn’t mean uprooting the colonial institutions and replacing them with institutions similar to those in the United States. Instead, theirs was “path-dependent” change leading only to the next stage of the institutions that had already made much of Latin America poor and unequal.
Contrast to:
Newport set sail once more for England, in December 1608. He took with him a letter written by Smith pleading with the directors of the Virginia Company to change the way they thought about the colony. There was no possibility of a get-rich-quick exploitation of Virginia along the lines of Mexico and Peru. There were no gold or precious metals, and the indigenous people could not be forced to work or provide food. [...] It took the Virginia Company twelve years to learn its first lesson that what had worked for the Spanish in Mexico and in Central and South America would not work in the north. The rest of the seventeenth century saw a long series of struggles over the second lesson: that the only option for an economically viable colony was to create institutions that gave the colonists incentives to invest and to work hard.
WNF gives another example of institutional difference with the case of Carlos Slim, who got rich off corruption and extractive institutional favoritism in Mexico, tried to expand his business empire into America, and was slapped down by a court of the better-functioning American institutions.
So far we're up to saying America works better than Mexico, and America has better institutions than Mexico, with Nogales as a nicely illustrative anecdote, but the case for the institutions being causal is weak.
Chapter 2: Theories that Don't Work
More specifically than "why nations fail", here is an illustration of the puzzle WNF wants to discuss and explain: why is prosperity distributed the way this map shows?
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. Most hypotheses that social scientists have proposed for the origins of poverty and prosperity just don’t work and fail to convincingly explain the lay of the land.
This chapter starts by attempting to more thoroughly rebut "The Geography Hypothesis". WNF uses the American-Mexican example from the first chapter, as well as East and West Germany, and North and South Korea. This is a fine rebuttal to naïve geographic absolutism, which I not a position I've seen anyone take. For geography as a major factor, the first example did not convince me, and the other two only show that geography is a lesser factor than Communism - and Communism was temporarily a very heavy factor. (We'll get back to that next chapter.)
WNF next picks a fight with Jared Diamond, and misrepresents Diamond's thesis while assuming frictionless transcontinental transfer.
WNF continues dunking on naïve geographic absolutism by saying that Central America used to be much richer than North America centuries ago, but now that's reversed.
Next, WNF takes on "The Culture Hypothesis", which is very interesting for a book with an institutions hypothesis. Here I expected a fine demarcation between culture and institutions with reasoning and measurements. What I got was vague ambiguity. Quote:
Is the culture hypothesis useful for understanding world inequality? Yes and no. Yes, in the sense that social norms, which are related to culture, matter and can be hard to change, and they also sometimes support institutional differences, this book’s explanation for world inequality. But mostly no, because those aspects of culture often emphasized—religion, national ethics, African or Latin values—are just not important for understanding how we got here and why the inequalities in the world persist. Other aspects, such as the extent to which people trust each other or are able to cooperate, are important but they are mostly an outcome of institutions, not an independent cause.
I object that institutions aren't an independent cause either, they're in a mutual causal loop with cultural aspects like trust and honesty!
There's no systematic measurement, not even a proxy value with caveats, there's anecdotes like France being counter-evidence to the 'Protestant Work Ethic' hypothesis of culture. They're good anecdotes, showing a breadth of knowledge about world history, but less professional than I expected. Above-average book.
The second chapter of WNF has its third argument with "The Ignorance Hypothesis", the idea that people or rulers don't know why nations fail, and therefore cannot simply decide to be prosperous instead. I think this hypothesis has strong support from the history of Communism, where a great many educated Westerners said ignorant things and made ignorant predictions about the effectiveness of economic central planning during the Cold War, and then the Soviet Union collapsed in poverty, surprising many people. But WNF thinks this is a non-problem, saying:
After all, if ignorance were the problem, well-meaning leaders would quickly learn what types of policies increased their citizens’ incomes and welfare, and would gravitate toward those policies.
I do not think this follows. WNF gives an example of prime minister Kofi Busia in Ghana being constrained by circumstances (rioting and a coup) where he couldn't implement World Bank policy, but the existence of other constraints in one case does not convince me that ignorance is not a factor more generally.
Those are their three competing theories that don't work: geography, culture, ignorance. In each one, WNF gives anecdotes which I read to show some other factor was also at work, and treats the theory as rebutted in general. I think each of these are relevant factors, particularly culture being institution-adjacent, and WNF is unfairly simplifying. If I were imitating their standard, I could use Liberia's failure despite copying US constitution and institutions as a rebuttal to the Institution Hypothesis, and now we're back to square one. It's more complicated than that.
Here I stopped to benefit from my PDF version of the book and searched for the following keywords: "Hajnal", "outbreeding", "cousin marriage", "consanguin", "marriage pattern", "nuptial", and got 0 hits for each. Again, Nobel Prize winners, 500-page book, plenty of space to treat hypotheses, well read, I feel they should be aware of this factor.
Something else to Ctrl-F for: "intelligence". The only time WNF uses that word is in phrases like "Central Intelligence Agency" and "intelligence services". This is a glaring omission.
Chapter 3: The Making of Prosperity and Poverty
Here we get a look at how much richer South Korea is than North Korea, and how this divergence is very recent (1950), and WNF talks up the good institutions of South Korea.
By the late 1990s, in just about half a century, South Korean growth and North Korean stagnation led to a tenfold gap between the two halves of this once-united country—imagine what a difference a couple of centuries could make. The economic disaster of North Korea, which led to the starvation of millions, when placed against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.
What went wrong in North Korea? Bad institutions.
Kim Il-Sung, a leader of anti-Japanese communist partisans during the Second World War, established himself as dictator by 1947 and, with the help of the Soviet Union, introduced a rigid form of centrally planned economy as part of the so-called Juche system. Private property was outlawed, and markets were banned.
A charitable reading here is that WNF's authors are trying to discreetly slip their argument past commies by avoiding the use of the word "communist" except in personal-historical characterizations like these partisans from the Second World War, they're arguing for good economic institutions (like private property and markets).
It goes on like this for a while. Representative quotes:
"Those in the South obtain a good education, and face incentives that encourage them to exert effort and excel in their chosen vocation. South Korea is a market economy, built on private property. South Korean teenagers know that, if successful as entrepreneurs or workers, they can one day enjoy the fruits of their investments and efforts; they can improve their standard of living and buy cars, houses, and health care."
"In the South the state supports economic activity. So it is possible for entrepreneurs to borrow money from banks and financial markets, for foreign companies to enter into partnerships with South Korean firms, for individuals to take up mortgages to buy houses. In the South, by and large, you are free to open any business you like. In the North, you are not. In the South, you can hire workers, sell your products or services, and spend your money in the marketplace in whichever way you want. In the North, there are only black markets. These different rules are the institutions under which North and South Koreans live."
"Inclusive economic institutions, such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers."
The descriptive examples sound like support for, broadly speaking, American capitalist conservatism. Later, the chapter gives a somewhat different explicit definition:
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.
This is part of the unintuitive technical definitions of "inclusive" and "extractive" that I mentioned earlier. Strong central power is emphasised in the extended discussion, touching on Somalia (pluralist but weak state) and Max Weber's definition of the state as holding the “monopoly of legitimate violence” in society. I consider Weber to be self-evidently wrong and wicked because of how he contradicts the right to self-defense, but WNF likes him and thinks that monopoly is necessary to avoid becoming a shithole like Somalia. (It doesn't use the word "shithole".)
WNF restates its thesis as "economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty. But this implies neither that extractive institutions can never generate growth nor that all extractive institutions are created equal." then proceeds to note some exceptions to this general pattern, such as industrialization in the Soviet Union.
In Chapter 2, WNF treated exceptions to competing hypotheses as rebuttals to the absolutist form of those; here they treat exceptions to their own hypothesis as interesting cases that show the full complexity of their nuanced hypothesis. It's a fine book with plenty of historical facts, but I keep feeling unconvinced by the connection between the facts presented and the conclusion they're used to support.
I'm three chapters in with extensive quotes and describing what the thesis is as to Why Nations Fail (bad institutions); I think I've made my point about the general shape of the book and will be briefer now in summarizing and excerpting the rest.
Chapter 4, Small Differences and Critical Junctures, is fatalist. For contingent historical reasons and lucky rolls of the dice, WNF says, the Black Death led to more Good institutions in Western Europe, particularly England, and more Bad institutions in East Europe. There is very little that can be done about institutions, even major shakeups like the Black Death may go in opposite directions. Similarly with the defeat of the Spanish Armada by the right man's death and the wrong weather, or Ming China turning away from long-distance sea voyages and trade at the wrong time around 1500AD. Fate and coincidence rule institutional development, and institutional development rules nations.
Chapter 5 is a deeper study in Growth under extractive institutions, notably the Soviet Union again, which managed to grow thanks to industrializing and copying one of the biggest upswings to have happened elsewhere. Westerners were very impressed by the Soviet Union's rate of growth, partly due to a late start.
Chapter 6, Drifting Apart, is a study of Venice and an early form of corporate investment there which brought great prosperity while elevating New Money and being "inclusive" (technical definition). Supposedly Venice later became "extractive" (technical definition) by closing access to political power and that's why the city-state declined in the late Middle Ages and early Renaissance. There's no mention of the Ottoman Empire here, or the Columbian Exchange, which also seem relevant to the decline of Venice and its Mediterranean trade prospects. Why these omissions?
Chapter 7, The Turning Point, opens with William Lee, the inventor of a 1589 knitting machine, who found his patent denied in both England and France because the rulers were afraid of the knitters being put out of work. This is an example of "extractive" institutions. We get an overview of baronial and Parliamentary conflict with the King of England, leading to the Magna Carta and more inclusive and pluralistic structures. This openness to self-made men and New Money is supposedly why the Industrial Revolution happened in England (simplified). WNF reiterates the fatalist view that this was contingent, not inevitable. Again, a lurking omission: England's coal deposits are not mentioned in a discussion of the Industrial Revolution starting there.
The reaction to Lee's brilliant invention illustrates a key idea of this book. 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. For sustained economic growth we need new technologies, new ways of doing things, and more often than not they will come from newcomers such as Lee. It may make society prosperous, but the process of creative destruction that it initiates threatens the livelihood of those who work with old technologies, such as the hand-knitters who would have found themselves unemployed by Lee’s technology. More important, major innovations such as Lee’s stocking frame machine also threaten to reshape political power. Ultimately it was not concern about the fate of those who might become unemployed as a result of Lee’s machine that led Elizabeth I and James I to oppose his patent; it was their fear that they would become political losers—their concern that those displaced by the invention would create political instability and threaten their own power.
Chapter 8, Barriers to Development, covers the Ottoman Empire banning and restricting the use of the printing press, the lack of strong centralized states in Sub-Saharan Africa, and how Spain diverged from England (good institutions!)
In England the defeat of absolutism in 1688 led not only to pluralistic political institutions but also to the further development of a much more effective centralized state. In Spain the opposite happened as absolutism triumphed. Though the monarchy emasculated the Cortes and removed any potential constraints on its behavior, it became increasingly difficult to raise taxes, even when attempted by direct negotiations with individual cities. While the English state was creating a modern, efficient tax bureaucracy, the Spanish state was again moving in the opposite direction. The monarchy was not only failing to create secure property rights for entrepreneurs and monopolizing trade, but it was also selling offices, often making them hereditary, indulging in tax farming, and even selling immunity from justice. The consequences of these extractive political and economic institutions in Spain were predictable.
Chapter 9, Reversing Development, covers colonialism and the slave trade producing Bad institutions outside of Europe. Even after the slave trade was banned, African countries that had oriented their economy around slaves turned to deploy those slaves on local plantations and export slave-produced goods. This chapter leans heavily on the technical sense of "extractive" to insinuate that pre-colonial institutions in Africa were better without outright saying anything false. There's also an emphasis on the European/Atlantic slave trade with no mention of the Ottoman slave trade.
It says about South Africa:
Black South Africans protested and rose up against the regime that did not recognize their basic rights and did not share the gains of economic growth with them. After the Soweto uprising of 1976, the protests became more organized and stronger, ultimately bringing down the Apartheid state.
No mention of the economic sanctions imposed on the Apartheid state by the US, the EU, Canada, Britain, and other countries including even Zimbabwe, or foreign aid and training for anti-apartheid movements, no, just "the protests" bringing it down. Another curious omission. Poltergeists!
Chapter 10, The Diffusion of Prosperity, adds some more examples from the French Revolution and Meiji Restoration to recap the theory of Good and Bad ("extractive") institutions.
Chapter 11, The Virtuous Circle, is about a positive feedback loop for Good institutions, the rule of law and the growth of democracy in England, and similar in America, where the institutions resisted Roosevelt's attempts at seizing power.
Inclusive economic and political institutions do not emerge by themselves. They are often the outcome of significant conflict between elites resisting economic growth and political change and those wishing to limit the economic and political power of existing elites. Inclusive institutions emerge during critical junctures, such as during the Glorious Revolution in England or the foundation of the Jamestown colony in North America, when a series of factors weaken the hold of the elites in power, make their opponents stronger, and create incentives for the formation of a pluralistic society. The outcome of political conflict is never certain, and even if in hindsight we see many historical events as inevitable, the path of history is contingent. Nevertheless, once in place, inclusive economic and political institutions tend to create a virtuous circle, a process of positive feedback, making it more likely that these institutions will persist and even expand.
Chapter 12, The Vicious Circle, is about the counterpart positive feedback loop for Bad institutions, in cases such as Sierra Leone and Guatemala, where a bad government destroys infrastructure to avoid empowering rivals, perpetuating bad goverment and underdevelopment and extractive institutions. There are similar claims about extractive institutions in the American South after the Civil War, which were eventually shut down by being included in the larger inclusive institutions of the United States of America.
With two positive feedback loops like this, and the role of chance and contingency, the books is very fatalistic about the possibility of institutional change.
(Note: I'm using the systems definition of a positive feedback loop as self-reinforcing, and a negative feedback loop as self-dampening. WNF calls a self-reinforcing system of extractive institutions a "negative feedback loop" because it has negative emotional connotation.)
Chapter 13, Why Nations Fail Today, frames the failed state of Zimbabwe as being the inevitable fault of white rulers in Rhodesia, despite their own story admitting that Rhodesia was improving and Zimbabwe was declining, and Mugabe forms a clear break point when he comes to power and murders thousands of dissidents and otherwise makes things abruptly worse.
NATIONS FAIL TODAY because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction. Extractive economic and political institutions, though their details vary under different circumstances, are always at the root of this failure.
I object to that "always", though WNF leaves me unsure whether they mean it in a falsifiable sense at all, given how they've played with the definition of "extractive" (Bad) institutions.
Chapter 14, Breaking the Mold, provides some examples of Bad institutions being replaced by Good institutions and improving a country, but closes by reiterating fatalism:
Despite the vicious circle, extractive institutions can be replaced by inclusive ones. But it is neither automatic nor easy. A confluence of factors, in particular a critical juncture coupled with a broad coalition of those pushing for reform or other propitious existing institutions, is often necessary for a nation to make strides toward more inclusive institutions. In addition some luck is key, because history always unfolds in a contingent way.
The one prediction/advice offered here is a free media.
Chapter 15, Understanding Prosperity and Poverty, is a recap of the book and a restatement of their thesis, acknowledging: "The predictive power of a theory where both small differences and contingency play key roles will be limited." Hey wait a minute what was that you were saying about "always at the root" two chapters ago, was that the other author?
The predictive power is limited, the systematizing is absent, the competing hypotheses are treated poorly, and there's curious omissions.
Partly this is because Acemoglu and Robinson have done their systematizing elsewhere and WNF is supposed to be a pop-sci treatment. I looked up one of their papers: "The Colonial Origins of Comparative Development: An Empirical Investigation." It argues that Europeans created Good institutions in places where they settled for themselves and Bad institutions in places where they instead looted the natives; but its data source for where Europeans settled is inference from lower death rate reported among European soldiers.
The factual data are something like "Places with higher death rates for European soldiers have lower per capita income today". A long chain of argument is supposed to show that institutions by settlers are the mediating factor here but I think the proxy variable is too distant and there's too many intermediate steps and confounds. Lots of Malaria in the 18th century killing Europeans, for example, can overlap with lots of Malaria today still depressing income, without institutions. Sometimes "European soldiers" means natives serving under and armed by Europeans, making the inferences less reliable.
I have attached one of their charts (note loglog scale), and to my eye it's showing a correlation but one that is too noisy for the authors' expressed degree of confidence. Look at that column of outcome variation stacked up on four-and-a-bit mortality.
Here is a more professional retort on the topic by an economist: Reply to Acemoglu and Robinson’s Response to my Book Review (direct PDF link).
In closing, Why Nations Fail has a point about institutions, which the authors overstate.
