The Value of Inclusion: A Commentary on Why Nations Fail
The following article is part of our archive and was published on 5/31/2014
In Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Darcon Acemoglu and James Robinson explain the roots of world inequality through a political framework. They contend that understanding world inequality rests in understanding who gets to make decisions and why they make these decisions. Their theory is a departure from prior attempts to explain world inequality through geography, culture, or the ignorance of leaders. The book negates these hypotheses, and gathers a significant amount of historical evidence suggesting that world inequality has developed through the failure of governments to create “inclusive” institutions, which “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.”
In contrast, the authors argue that impoverished countries are the byproducts of “extractive” institutions, which “extract incomes and wealth from one subset of society to benefit a different subset.” Extractive institutions create an environment that stifles innovation, the main source of economic growth, and thus countries with extractive institutions are less prosperous. On the other hand, inclusive institutions encourage innovation, and therefore countries that have inclusive institutions become prosperous. The natural talents and abilities of people are harnessed under inclusive institutions, which drive innovation and subsequently expand the economy.
If inclusive institutions are the key to economic success it would seem logical that governments would try to implement them in order to make their nation prosperous but, alas, some governments are more interested in self-preservation than creating a prosperous nation. The authors do a fantastic job of providing historical examples to substantiate their claims, especially in their use of British history. To understand why a government might deny “inclusive” institutions the authors examine Queen Elizabeth, who in 1589 denied William Lee a patent to his “stocking frame” knitting machine. While the creation was the type of innovation England needed to become prosperous Queen Elizabeth denied the patent because granting it would threaten her political power. The invention had the potential to put thousands of people out of work. Sensing the potential upheaval, Elizabeth denied the patent, but in doing so denied her country a major innovation that could have led to prosperity. Under governments like that of Queen Elizabeth, creative destruction, or the process of replacing an outdated method or object with something new, is generally hindered, and thus innovation rarely occurs.
But England’s fate changed in 1688 when the Glorious Revolution transferred power from the monarchy to parliament. This major transition of power led to the development of inclusive institutions, as power was distributed amongst a larger base. The book makes it clear that extractive institutions are generally the result of a government composed of a highly concentrated elite, meaning that a few people hold all the political power. The fewer people ruling, the more inclined they are to serve themselves and protect their political power. Queen Elizabeth held the vast majority of political power, and thus created extractive institutions that served and sustained her rule. The Glorious Revolution started to reverse this trend, and with it came inclusive institutions followed by creative destruction. Once creative destruction was enabled innovation could take place, and as a result, Britain was the first place to experience the Industrial Revolution.
The authors label the Industrial Revolution as a “critical juncture”, where an explosion of innovation took place. Nations that had the right institutions eventually took advantage of the Industrial Revolution, while nations that had extractive institutions missed this critical juncture. The book gives a well-rounded view of what happens to nations that miss critical junctures. Some of them change their political systems and eventually catch up, while others do not change and suffer from underdevelopment. In a sense, missing a critical juncture is bit like staying in the Stone Age, except governments have the ability to change their fate by creating inclusive institutions, and taking advantage of critical junctures. Hindsight is 20/20, so it is hard for governments to realize in the moment what a critical juncture is, and how it will affect them by missing it.
Replacing extractive institutions with inclusive ones is not an easy task, especially since extractive institutions follow, as the authors put it, a “vicious cycle”. In the vicious cycle “extractive political institutions forg[e] extractive economic institutions, which in turn create the basis for the persistence of extractive political institutions.” The cycle is hard to break, but it is not impossible to do. The example of the Glorious Revolution proves this, but the authors state that the vicious cycle can also be broken through critical junctures or through civil action by a nation’s people. While extractive institutions can be changed many nations under the influence of the vicious cycle do not seek change. This is evident in places like North Korea and certain nations in Africa where the government benefiting from the extractive institutions has no reason to change course toward inclusive institutions.
While the authors use historical examples as the primary means to corroborate their claims they do not get stuck in isolated periods of time. They apply what they derive from the historical examples to nations that are currently suffering from mass inequality. Their historical support is thorough, but the beauty of the book lies in their application of the examples to the modern world. Their analysis helps explain the world as it is today, but also predicts where it will be tomorrow. This is evident in their examination of China, where they see growth that “is based on the adoption of existing technologies and rapid investment, not creative destruction.” The lack of creative destruction, or actual innovation, and the extractive institutions that dominate China gives the nation a rather dreary outlook. The authors’ claims become more substantial as they relate them to the modern world, and as the reader can see them taking place right before their very eyes.
The power of this book lies in its fifteen years of dedicated research, which the authors do an excellent job of summarizing in a surprisingly readable book. The book is not weighted down by jargon but rather is layered with eloquent explanation, which can be easily understood by a broad audience. Why Nations Fail will surely stand the test of time, and will become a definitive work on global inequality.
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