Why Nations Fail by Daron Acemoglu raises a convincing theory to answer the question: Why are some nations wealthy and some nations poor. A few years ago, I read Jarrad Diamond’s Guns, Germs and Steel which tries to answer the same question. Each book arrives at two very different answers to the question.
Guns, Germs and Steel makes an argument that hinges around geographic luck factors. During the agrarian revolution, societies located in the Fertile Crescent were naturally endowed with cereal crops and domesticatable animals. Diamond argues that these species had the characteristics required to transition from a hunter-gatherer to an agrarian social structure. For example, wheat is weather resistant, can be stored for long periods and has a high calorie/effort ratio. These species can also be grown in a human controlled environment where humans tend to and care for the crops. Diamond covers the defining set of characteristics in much more depth and makes a convincing argument
These unique crops and animals (wheat, barley, legumes, goats, sheep and cattle) that were naturally found in the Fertile Crescent allowed societies in this region to increase food production productivity. Productivity gains in food production freed time within collective groups to focus on other endeavors. This agrarian transition is attributed with being the causal factor in the new paradigm of human jobs specialization.
Skill specialization is central to the development of utilitarian technologies. Diamond argues that this initiated a virtuous circle. Specialization in labor, such as a community doctor, allowed for expertise and knowledge to accumulate. The specialized technician was able to develop superior skills through experience and repetitive data collection. Stronger mental models of a problem, such as treating a fever, enabled technicians to intelligently experiment and develop technologies that assisted in achieving their goal. The technology increases utility for the society, which frees up more human hours for deeper specialization, which then increase utility again. The process of specializing and innovation is a defining difference of sapiens pre vs. post 10,000 BC. Diamond’s fundamental argument is that this virtuous circle originated in the hands of a lucky geographically endowed group. This summary does not do the theory complete justice, but for the purposes of comparison it is enough.
Why Nations Fail takes a radically different approach. Acemoglu dismisses the theories of Diamond by highlighting examples such as North vs. South Korea and Nogalas Sonora vs. Nogalas Arizona. These societies are located in identical locations, are filled with people that are genetically similar, yet experience drastically different levels of prosperity. This argument demonstrates that Diamonds model is not as applicable today. In my opinion, Acemoglu fails to make the distinction of the theory’s applicability to pre-modern humans vs. modern hypercomplex networked society. I believe that Diamond’s theory is highly applicable to pre-modern human societies. In fact, Diamond’s theory helps explain the transition to modern, complex and abstracted societal institutions. This gives more context to support the theory proposed in Why Nations Fail.
Daron’s theory proposes that the critical factor in determining national prosperity is contingent on the quality of the nation’s institutions. What are institutions? Institutions are usually abstracted constructs that set norms of behavior within a group. There are two main categories of institutions: political and economic. Institutions can be thought of as “inclusive” vs. “exclusive”. Inclusive institutions are those where power and involvement is pluralistically distributed on a non-discriminatory basis to constituents. Extractive institutions allow a relatively small group of individuals to exploit a majority for their benefit. This can materialize in many form, but fundamentally one group “extracts” from another.
Political institutions are critical as they describe the processes and norms that shape and set the rules for other institutions. Political institutions are the instrument of institutional selection. For this reason, the type of political institution that governs a society is highly deterministic of the societies ability to become prosperous. Why Nations Fail does an excellent job in examining the rational selection biases and self-reinforcing pressures that would make it unlikely for a nation with extractive political institutions to have inclusive economic institutions. For example, in an extractive political context, the elite are likely to use their vested institutional selection powers to create economic institutions that concentrate economic resources to the political elite. This not only allows them to personally consume and avoid hardship, but further solidifies their ability to maintain the power of their extractive political institution. A reinforcing cycle is created, and the extractive elite’s position is solidified. The theory is quite robust but does not endeavor to explain the success of the Singaporean political system, a salient outlier to the model.
Economic institutions are those that organize and determine the flow of resources within a society. Economic institutions too can be thought of as being inclusive or extractive. Modern institutions such as double-book entry bookkeeping, contract law, currency, and market regulation are all examples of economic institutions. In a Western context, these institutions lean towards inclusivity as pluralistic participation is allowed. In a polarized position, Marxist communism would be considered highly extractive as economic decision-making power is centralized.
The book argues that the behavior an institution incents is the primary contingent factor when determining societal prosperity.
Why Nations Fail presents a theoretical model that can be extended to evaluate policy and the various abstracted institutions that define modern society. Growing up, I never understood, or got a satisfactory answer to, why the left – right spectrum is used. I would ask teachers to explain what were fundamentally “left” characteristics and they would reply “collectivism”. This is a horrible mislabeling, as the optimization goal of abstracted institutions is to achieve collective action. This causes confusion and distorts proper analysis. “Right” institutions prefer to achieve collective goals via individualistic incentives and “left” institutions prefer a more direct approach. Using the left-right framework to analyze almost every social, political, and economic is therefore extremely weak. The spectrum carries a massive amount of illogical baggage which has shifted its meaning over time. I believe that the spectrum of inclusive vs. exclusive provides a much better framework. Not only, does it redefine and properly label the nature of an institution’s structure, but also, provides clearer analysis because of a “tabula rasa” effect.
I would highly suggest reading Why Nations Fail as it will engage you in an evoking thought experience that will force you to re-evaluate your surroundings.