Economists assert that above all else, political institutions determine the wealth of nations

Mar 23, 2012 b yPeter Dizikes
Daron Acemoglu. Photo: Allegra Boverman

It is among the grandest topics in scholarship: Why do some nations, such as the United States, become wealthy and powerful, while others remain stuck in poverty? And why do some of those powers, from ancient Rome to the modern Soviet Union, expand and then collapse?  

From Adam Smith and Max Weber to the current day, scores of writers have grappled with these questions. Some scholars, like Weber, have argued that religious or cultural differences create vastly different economic outcomes among countries. Others have asserted that a lack of natural resources or technical expertise has prevented poor countries from creating self-sustaining economic growth.

Economists Daron Acemoglu of MIT and James Robinson of Harvard University have another answer: Politics makes the difference. Countries that have what they call “inclusive” political governments — those extending political and property rights as broadly as possible, while enforcing laws and providing some public infrastructure — experience the greatest growth over the long run. By contrast, Acemoglu and Robinson assert, countries with “extractive” political systems — in which power is wielded by a small elite — either fail to grow broadly or wither away after short bursts of economic expansion.

“You need political equality to underpin economic prosperity,” says Acemoglu, the Elizabeth and James Killian Professor of Economics at MIT. More specifically, he says, economic growth depends on widespread technological innovation. But widespread innovation is only sustained where countries promote rights, giving more people the incentive to invent things.

And while Acemoglu and Robinson have documented this thesis during roughly 15 years of joint research, now, in their new book, Why Nations Fail, released this week by Crown Publishers, they look more closely than ever at the collapse or stagnation of countries that lack these inclusive political systems.

Elites, Why Nations Fail asserts, resist innovation because they have a vested interest in resisting change — and new technologies that create growth can alter the balance of economic or political assets in a country.

“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,” Acemoglu and Robinson write. Yet when elites temporarily preserve power by preventing innovation, they ultimately impoverish their own states.

Why cultural explanations of prosperity fail

In Acemoglu’s own telling, their interpretation of history “is obvious at some level. Institutions shape incentives, and incentives are important.” However, he adds, “it’s not the conventional wisdom.”

Indeed, Weber, in 1919, influentially argued that the “Protestant ethic” — a culture of work buttressed by a belief system that rewarded forward-looking investment — had made Protestant European countries wealthy. In a related approach, many writers have recently argued that culture of Islam restricts growth. Others, such as life scientist Jared Diamond in his 1997 best seller Guns, Germs, and Steel, have asserted that the availability of natural resources has had an enormous effect on long-term prosperity.

Acemoglu and Robinson believe that these explanations fall short. For one thing, European countries with different sorts of cultures, Protestant and Catholic alike, have grown rich. Secondly, different countries within the same broad cultures have performed very differently in economic terms, such as the two Koreas in the post-war era. Moreover, individual countries have changed their economic trajectories even though “their cultures didn’t miraculously change,” as Acemoglu says.

Finally, some countries with similar kinds of natural resources have taken sharply different economic paths in the modern era; the average Spaniard is six times as wealthy as the average Peruvian, for instance.

“We were inspired by Guns, Germs and Steel,” Acemoglu says, “but our thesis is very different.”

‘Natural experiments’ around the world

Instead, as Acemoglu and Robinson see it, the “turning point” in world economic history was England’s “Glorious Revolution” of the late 1600s, the key moment in a longer-term process that expanded the political and property rights (including patent protections) available to people. Plenty of innovators existed before then, but had not been rewarded for their efforts; by the late 1700s, England had embarked on the largest sustained period of economic growth since the Neolithic age.

To test this reading of history, Acemoglu and Robinson use a variety of “natural experiments” (some developed in collaboration with MIT economist Simon Johnson) to examine how, other things being equal, contrasting political institutions alter the economic trajectories of countries.

Take North and South Korea, two countries with a common history, culture, climate and natural resources. Since their split in 1948, North Korea has become one of the poorest countries in the world, while South Korea is rich; there is now a tenfold gap in wealth between the states. Why? Because South Korea, Acemoglu and Robinson assert, despite political turmoil of its own, has evolved into an inclusive political system. The Korean peninsula, Acemoglu says, is a classic example of “two countries with very different institutions, but not because the people wanted it. That gives you a window into the long-term consequences of an institutional divergence.”

Likewise, the city of Nogales, Ariz., shares a culture, history, climate and resources with its twin city of Nogales, Mexico, right across the border. But the Nogales in the has an average household income of $30,000, three times that of Nogales, Mexico, which long languished under one-party rule. Similarly, in Africa, Botswana — which has maintained a democracy with property rights since gaining independence in 1966 — has the highest per-capita income in the sub-Saharan region, while its neighbor Zimbabwe remains an impoverished dictatorship.

Countries like Zimbabwe, Acemoglu says, also discredit the idea that autocratic leaders simply do not know which policies would lead to growth, a notion he finds to be “overwhelmingly popular among academics” who want their own findings to be implemented.

“Most consequential ‘policy mistakes’ are by design,” Acemoglu says. “These leaders are choosing policies that don’t maximize economic prosperity, because their objective is different: to hold onto power or simply enrich themselves.”

Why Nations Fail has already drawn plaudits from many social scientists. Joel Mokyr, an economic historian at Northwestern University, calls it an “incredibly creative book,” and hails its emphasis on politics. In decades past, Mokyr says, economists focused more “on models and competition, and institutions didn’t matter.” But in the future, he says, “what will remain influential from Acemoglu and Robinson above all else is an understanding of the significance of political power in the distribution of economic resources.”

Lessons for today

To be sure, some extractive states do experience economic growth due to “technological catch-up,” as Acemoglu and Robinson note in the book. The boasted a tremendous growth rate — 6 percent annually — between 1928 and 1960, as it changed from an agricultural to an industrial economy. But the country had no way to encourage further technological innovation, and began collapsing by the 1980s.

Other states in world history have experienced significant growth, and then collapsed. Acemoglu and Robinson believe that the ancient Roman republic grew in large part by extending rights to citizens and developing a partially inclusive political system, but that when Rome became an autocratic empire around 30 B.C., its fate was sealed. The same process occurred in Venice, a trading powerhouse of early modern Europe where the elite class choked off innovation in an attempt to keep the spoils for itself.

Such examples carry lessons for today, Acemoglu and Robinson believe — such as the notion that history does not occur in progressive fashion.

“Political institutions are very conflictual,” Acemoglu says. “They are always challenged. There is no guarantee there won’t be steps back, like in Rome or Venice. I think it’s very important to recognize that, because it prevents complacency.”

Another lesson is that prosperity hinges on rights being granted throughout society, not just to a limited class of people. “Property rights are very important, but in a context where everybody has access to them,” Acemoglu says. “You can’t have a situation where only slave owners or plantation owners have property rights. That’s not enough.”

Looking around the globe today, the limited extension of political rights in China makes Acemoglu cautious about the long-term prospects for Chinese growth “unless the country reforms itself” politically. Yet Acemoglu says he and Robinson are “optimistic” about the prospects for growth in the North African states witnessing revolutions in the last year.

For all the ongoing problems in establishing an inclusive political system in Egypt, he says, “against all odds, people are going on the streets again. The big thing is that the genie is out of the bottle. People know they can have their voices be heard. Once they have that emboldening, it’s much harder to keep a repressive, unresponsive regime going.”

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Vendicar_Decarian
0.4 / 5 (40) Mar 23, 2012
It is no coincidence that America's Economic Decline started with the increase in popularity of America's Borrow and Spend Republican Party.
ryggesogn2
2.6 / 5 (5) Mar 23, 2012
", countries with extractive political systems in which power is wielded by a small elite "
AKA socialism/'progressivism'/'liberalism' which has been the US policy since Teddy Roosevelt.
"Another lesson is that prosperity hinges on rights being granted throughout society, "
Why did it take so long for the modern 'intellectuals' to discover what many have known for centuries?
Vendicar_Decarian
0.2 / 5 (38) Mar 23, 2012
I had no idea that an elite group of nations is also known as Socialism.

Tard Boy needs to get off the drugs, and start acting rationally.

"Why did it take so long for the modern 'intellectuals' to discover what many have known for centuries?" - RyggTard

Somehow I doubt if these intellectuals would agree with Tard Boy on what "rights" are to afforded to Libertarian Tards.

The Legalization of Child prostitution and forced child labout for example as promoted by Libertarian Ideology wouild no be accepted by intellectuals.
AWaB
not rated yet Mar 24, 2012
I can't wait to leave work and go and buy this book (yeah, it's Saturday, I know. Kids, don't get a job at a power plant). I've read several economists discuss property rights being one of the fundamental reasons for sustained economic growth. Botswana and South Korea have been primary examples in these articles. This article makes me think that this book might have a little more to add to the theory.
ryggesogn2
2 / 5 (4) Mar 24, 2012
"The law of property determines who owns something, but the market determines how it will be used. It's so obvious to me that I couldn't understand the fuss. All it says is that the people will use resources in the way that produces the most value, that's all. I still think it's an obvious point. You wouldn't think there was a need for a Coase Theorem, really."
http://reason.com...nglepage
"Let's consider a poor individual living in a house without a title or even an address in Mexico. He hopes to formalize his house. So, he visits a local bank to apply to register his property. To the bank, he represents potential demand for credit -- the bank has incentive to research his claim, help him map his land, assess any improvements, and submit his information to the registry. The bank would do this in return for his loan business and a fee to cover costs. "
http://www.foreig...et_muham
ryggesogn2
2 / 5 (4) Mar 24, 2012
"De Soto estimates that the poor in Mexico already hold well over $300 billion in frozen savings. Modern registries would facilitate micromortgages and so prove to be an enormous economic boon to both businesses and the poor -- all at no great risk or cost for poor governments.

Yunus and de Soto offer us real insights into how the poor can, finally, work themselves out of poverty: Yunus shows they need credit and de Soto shows they need to join the formal economy. But we must build on their ideas and combine them in order to develop a more viable way to realize their inherent promise. If the world's poor can gain access to private capital via their formal titles, then we will have a real solution to a $9 trillion problem. "
http://www.foreig...page=0,1
ryggesogn2
2 / 5 (4) Mar 24, 2012
"Gift Muti, spokesperson for the General Agricultural Plantation Workers Union of Zimbabwe, said farm workers have suffered a great deal since Mugabes government started seizing white-owned land more than a decade ago.
"
http://www.voanew...173.html
ryggesogn2
2 / 5 (4) Mar 24, 2012
"Businessmen in deciding on their ways of doing business and on what to produce have to take into account transaction costs."
"I explained in The Problem of Social Cost that what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system."
http://www.nobelp...ure.html
ryggesogn2
2 / 5 (4) Mar 24, 2012
"It is not because men have made laws, that personality,
liberty, and property exist. On the contrary, it is
because personality, liberty, and property exist beforehand,
that men make laws."
"Collective right, then, has its principle, its reason for
existing, its lawfulness, in individual right; and the common
force cannot rationally have any other end"
"It would be impossible, therefore, to introduce into
society a greater change and a greater evil than thisthe
conversion of the law into an instrument of plunder."
http://mises.org/...elaw.pdf
ForFreeMinds
1.8 / 5 (5) Mar 25, 2012
Simply: governments that protect liberties (the right to own and use your property, the right to keep the fruits of your labor, freedom to contract with others, etc.) result in increased wealth. Government that use their power (by using force to extract wealth from citizens) to enrich the politically connected become poor.

The further a government goes beyond protecting freedom/liberties (from criminals, foreign enemies and especially busybodies and thieves in government) the poorer it will become.
ryggesogn2
1 / 5 (3) Mar 25, 2012
Simply: governments that protect liberties (the right to own and use your property, the right to keep the fruits of your labor, freedom to contract with others, etc.) result in increased wealth. Government that use their power (by using force to extract wealth from citizens) to enrich the politically connected become poor.

The further a government goes beyond protecting freedom/liberties (from criminals, foreign enemies and especially busybodies and thieves in government) the poorer it will become.

This has bee demonstrated time and time again but socialists still pursue their plans to plunder.
Which leads me to the conclusion the socialist's goal is NOT individual prosperity, but power, control. Better rule in hell...
Callippo
1.7 / 5 (3) Mar 25, 2012
the socialist's goal is NOT individual prosperity, but power, control.
The goals of socialists and capitalists are the same, they're just dual, as AWT explains. Both extremes are harmful for human society.The contemporary financial crisis illustrates clearly, the keeping of bursa and highly derived financial products of advanced economy requires the strong patrolling role of state as well. And who still didn't realize it is just an dangerous idealist. Most of political troubles of modern civilization were caused just by ideologies supported by various idealists, both proponents of free market society, both communism.
ryggesogn2
1 / 5 (3) Mar 25, 2012
The goals of socialists and capitalists are the same,

No, they are not.
Real capitalists promote individual liberty as they must use persuasion to earn profit and grow.
Phony capitalists use the legal plunder of the state to stay in power.
Snickersnee
5 / 5 (1) Mar 26, 2012
A very selective analysis that leaves out three crucial factors: separation of religion and state, and women's equality, and freedom of speech/inquiry. Notably the Muslim world lacks all three while western civilization, thanks to the Enlightenment, is based on these precepts. The notion that private property and economic rights are decisive is a self serving idea...and the notion that we have a truly free market is also mistaken. The celebrated free market is no more real than the celebrated socialism was: a nifty piece of social propaganda covering up corruption and predation as much as capitalism does. I find the emphasis on economics by capitalists as fraudulent and pernicious as its emphasis under socialilsm. Economics does not determine all of human relations, but both socialists and capitalists still think it does, to the detriment of both social justice and the integrity of our planet. Social relations and human relationship to Nature are the determinants of survival.
ryggesogn2
1 / 5 (2) Mar 26, 2012
Economics does not determine all of human relations,

It determines the most important ones, like survival.

"Smith did not view sympathy and self-interest as antithetical; they were complementary. Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only, he explained in The Wealth of Nations.4

Charity, while a virtuous act, cannot alone provide the essentials for living. Self-interest is the mechanism that can remedy this shortcoming. Said Smith: It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest"
http://www.econli...ith.html
Job001
1 / 5 (2) Mar 27, 2012
Is a good capitalist or a good socialist those who resist corruption by the elite? It appears self and social interest must be balanced with a modest GINI index of about 0.7 to attain highest growth and GDPPP. Higher levels are like dictators, oligarchies, and monarchs while lower GINI's represent higher levels of social inclusion and less incentives for growth.
ryggesogn2
1 / 5 (2) Mar 27, 2012
Is a good capitalist or a good socialist those who resist corruption by the elite?

What is 'the elite'?
Capitalists want the law to protect individuals and their property rights enabling the prosperity of persuasion.
Socialists want the law to plunder individuals and their property which requires coercion and promotes corruption.
Job001
1 / 5 (1) Mar 27, 2012
Hardly, bad capitalists use corrupt protection of obsolete IP and production and monopolistic marketing, including privatizing profits and making public the losses. Bad socialists frame things with personal greed rather than social need also. No political platform is good without ignorant consequence.
ryggesogn2
1 / 5 (2) Mar 27, 2012
Hardly, bad capitalists use corrupt protection of obsolete IP and production and monopolistic marketing, including privatizing profits and making public the losses. Bad socialists frame things with personal greed rather than social need also. No political platform is good without ignorant consequence.

'Bad capitalists' are socialists. They use the law to plunder, not persuade, like all socialists do, plunder.
Vendicar_Decarian
not rated yet Mar 27, 2012
"liberty, and property exist." - RyggTard

"Society doesn't exist." - Conservative heroine Margaret Thatcher.
Vendicar_Decarian
not rated yet Mar 27, 2012
Everything is a socialist on planet Zombo.com

"Bad capitalists' are socialists." - RyggTard

Vendicar_Decarian
not rated yet Mar 27, 2012
Is that why CocaCola wanted to make it illegal for South Americans to collect rain water for their own use.

A fine example of how Capitalists respect individual liberty.

Don't you agree Libertarian Tard Boy?

"Capitalists want the law to protect individuals and their property rights" - RyggTard
Vendicar_Decarian
not rated yet Mar 27, 2012
Tell that to your dog, or to a child.

Maybe we have hit upon the reason why Libertarians are pro child labor and pro child prostitution.

"Charity, while a virtuous act, cannot alone provide the essentials for living." - RyggTard
Vendicar_Decarian
not rated yet Mar 27, 2012
You have continually shown that you don't have the capacity to draw logical conclusions.

"Which leads me to the conclusion..." - RyggTard
ryggesogn2
1 / 5 (2) Mar 28, 2012
"Corruption is the most important threat facing the ruling party," Wen said in comments published late Monday on the website of the State Council, China's cabinet."
"In December, villagers in the southern province of Guangdong lived under police blockade for more than a week after driving out Communist Party leaders they said had been stealing their land for years."
http://www.spacew...999.html
The party of Plunder.

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