Author: Daron Acemoglu

ISBN: 978-1846684302

An interesting theory as to why some nations fail and the others prosper. A very interesting read!

EXCERPTS

Repression + absence of social justice + denial of channels for peaceful change = a ticking bomb.

To Egyptians, the things that have held them back include an ineffective and corrupt state and a society where they cannot use their talent, ambition, ingenuity, and what education they can get. But they also recognize that the roots of these problems are political. All the economic impediments they face stem from the way political power in Egypt is exercised and monopolized by a narrow elite. This, they understand, is the first thing that has to change.

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.

The main obstacle to the adoption of policies that would reduce market failures and encourage economic growth is not the ignorance of politicians but the incentives and constraints they face from the political and economic institutions in their societies. [Usually their financial backers.]

Achieving prosperity depends on solving some basic political problems. It is precisely because economics has assumed that political problems are solved that it has not been able to come up with a convincing explanation for world inequality. Explaining world inequality still needs economics to understand how different types of policies and social arrangements affect economic incentives and behavior. But it also needs politics.

South Korea was led, and its early economic and political institutions were shaped, by the Harvard- and Princeton-educated, staunchly anticommunist Syngman Rhee, with significant support from the United States. Rhee was elected president in 1948. Forged in the midst of the Korean War and against the threat of communism spreading to the south of the 38th parallel, South Korea was no democracy. Both Rhee and his equally famous successor, General Park Chung-Hee, secured their places in history as authoritarian presidents. But both governed a market economy where private property was recognized, and after 1961, Park effectively threw the weight of the state behind rapid economic growth, channeling credit and subsidies to firms that were successful. The situation north of the 38th parallel was different.

Lack of private property meant that few people had incentives to invest or to exert effort to increase or even maintain productivity. The stifling, repressive regime was inimical to innovation and the adoption of new technologies.

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.

Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations. But such rights must exist for the majority of people in society.

Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society. Secure property rights, the law, public services, and the freedom to contract and exchange all rely on the state, the institution with the coercive capacity to impose order, prevent theft and fraud, and enforce contracts between private parties. To function well, society also needs other public services: roads and a transport network so that goods can be transported; a public infrastructure so that economic activity can flourish; and some type of basic regulation to prevent fraud and malfeasance. Though many of these public services can be provided by markets and private citizens, the degree of coordination necessary to do so on a large scale often eludes all but a central authority.

The state is thus inexorably intertwined with economic institutions, as the enforcer of law and order, private property, and contracts, and often as a key provider of public services.

Inclusive economic institutions need and use the state.

Definition of the state, identifying it with the “monopoly of legitimate violence” in society. Without such a monopoly and the degree of centralization that it entails, the state cannot play its role as enforcer of law and order, let alone provide public services and encourage and regulate economic activity. When the state fails to achieve almost any political centralization, society sooner or later descends into chaos, as did Somalia.

The success and failure of specific groups notwithstanding, one lesson is clear: powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded.

The central thesis of this book is that 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. There are two distinct but complementary ways in which growth under extractive political institutions can emerge. First, even if economic institutions are extractive, growth is possible when elites can directly allocate resources to high-productivity activities that they themselves control.

The second type of growth under extractive political institutions arises when the institutions permit the development of somewhat, even if not completely, inclusive economic institutions. The rapid industrialization of South Korea under General Park is an example. [And China.]

A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development—an all-too-common occurrence due to the fear of creative destruction.

As the territories Romans controlled expanded, vast numbers were enslaved, often being brought back to Italy to work on large estates. Many citizens in Rome did not need to work: they lived off the handouts from the government. Where was innovation to come from? We have argued that innovation comes from new people with new ideas, developing new solutions to old problems. In Rome the people doing the producing were slaves and, later, semi-servile coloni with few incentives to innovate, since it was their masters, not they, who stood to benefit from any innovation. As we will see many times in this book, economies based on the repression of labor and systems such as slavery and serfdom are notoriously noninnovative.

Of course slavery and serfdom created huge wealth for those who owned the slaves and controlled the serfs, but it did not create technological innovation or prosperity for society.

Finally, in 1589, his “stocking frame” knitting machine was ready. He traveled to London with excitement to seek an interview with Elizabeth I to show her how useful the machine would be and to ask her for a patent that would stop other people from copying the design. He rented a building to set the machine up and, with the help of his local member of Parliament Richard Parkyns, met Henry Carey, Lord Hundson, a member of the Queen’s Privy Council. Carey arranged for Queen Elizabeth to come see the machine, but her reaction was devastating. She refused to grant Lee a patent, instead observing, “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.”

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. As we saw with the Luddites, it is often possible to bypass the resistance of workers such as hand-knitters. But the elite, especially when their political power is threatened, form a more formidable barrier to innovation. The fact that they have much to lose from creative destruction means not only that they will not be the ones introducing new innovations but also that they will often resist and try to stop such innovations

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.

A fundamental reorganization of economic institutions in favor of innovators and entrepreneurs, based on the emergence of more secure and efficient property rights.

The fact that there were first limited political reforms and that repeal of the Corn Laws came on the agenda only later defused conflict. Gradual change also prevented ventures into uncharted territories. A violent overthrow of the system means that something entirely new has to be built in place of what has been removed. This was the case with the French Revolution, when the first experiment with democracy led to the Terror and then back to a monarchy twice before finally leading to the French Third Republic in 1870.

The rise of Robber Barons and their monopoly trusts in the late nineteenth and early twentieth centuries underscores that the presence of markets is not by itself a guarantee of inclusive institutions. Markets can be dominated by a few firms, charging exorbitant prices and blocking the entry of more efficient rivals and new technologies. Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful. Inclusive economic institutions require not just markets, but inclusive markets that create a level playing field and economic opportunities for the majority of the people. Widespread monopoly, backed by the political power of the elite, contradicts this. But the reaction to the monopoly trusts also illustrates that when political institutions are inclusive, they create a countervailing force against movements away from inclusive markets.

The U.S. experience in the first half of the twentieth century also emphasizes the important role of free media in empowering broad segments of society and thus in the virtuous circle.

Inclusive political institutions allow a free media to flourish, and a free media, in turn, makes it more likely that threats against inclusive economic and political institutions will be widely known and resisted.

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.

Continued foreign aid should depend on recipient governments meeting certain conditions—for example, liberalizing markets or moving toward democracy.

First, foreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it. Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can typically do little in this respect, and certainly not with the way that it is currently organized.

Instead, perhaps structuring foreign aid so that its use and administration bring groups and leaders otherwise excluded from power into the decision-making process and empowering a broad segment of population might be a better prospect.