Finished this book recently and wanted to make a general review on it. I will do my best to make a relatively small summation of a mammoth of a book.
Why I chose it:
I really really like new institutional economics, so when I had to choose a book for economic research, I naturally chose something within that category of economics. Ergo, The Origins of Power, Prosperity, and Poverty: Why Nations Fail by Daron Acemoğlu and Jame Robinson.
Especially after the Great Recession, the dissolution of the USSR, the instability of the E.U., and the rise of new world powers, we see the influence of institutions all around the globe. Yet, institutions also affect us on the micro level, determining and influencing how education systems work, how legal systems represent citizens, and determining the functions of your bank. Long story short, institutions like government, religion, and markets determine and influence a large part of your life. It makes sense that new institutional scholars believe institutions are partly determinant of what makes a society prosperous and pluralist vs ravaged by poverty and absolutist rule.
All of these reasons are why Acemoğlu and Robinson wrote Why Nations Fail. In 529 pages, the authors attempt to create a more unified theory of economic prosperity and poverty. Using a framework based on analyzing Institutions, Acemoğlu and Robinson address the problem of “why poor nations ‘get it wrong'” in contrast to most economists, whom emphasize poor nations “getting it right.” The world has no shortage of intellectuals willing to prescribe a solution to failing nations, but few individuals attempt to understand why nations fail to succeed from the very beginning. By addressing such an under-covered issue, Acemoğlu and Robinson created a book containing excellent economic theory and analysis of economic history and institutions.
Inclusive vs Extractive Institutions
Within Why Nations Fail, Acemoğlu and Robinson introduce their theory of ‘inclusive’ and ‘extractive’ institutions. For the authors, pluralism, effective centralization, and recognition of property rights make up some of the defining characteristics of inclusive economic and political institutions, while extractive institutions benefit the elites at the cost of the general welfare. In the lengthy and extensive historical analysis conducted in Why Nations Fail, Acemoğlu and Robinson highlight repeatedly how the majority of human history fell under extractive institutions, how growth was unsustainable under such institutions, and that inclusive institutions are a relatively new phenomena.
How institutions change and how institutions influence societies
The questions of ‘how institutions change over time’ and ‘why some institutions created prosperity, while most do not,’ make the foundation for the two other major ideas discussed within Why Nations Fail. Acemoğlu and Robinson argue that a combination of critical junctures (major events, such as revolutions, technological change, etc) and historical contingency (pure chance, decisions by individuals) create ‘institutional divergence.’ A major example used by the authors, the development of Europe over time provides a contrast of institutional divergence both from within the continent and outside of it. Nations within Western Europe responded similarly to the black plague because of the similar institutional framework of these nations. The instability brought by the Black Plague, in combination with the relative decentralization of feudal lords, allowed serfs to fight for greater freedom and rights in Western Europe. Conversely, Eastern Europe’s feudal society was much more authoritarian and centralized, which allowed the rulers to increase their control over the serf population and create even more extractive institutions.
Compared with the rest of the globe, however, and continental Europe experienced similar institutional change while regions like Africa and Asia went further into absolutism.
This single example shows how relatively small institutional differences can create huge institutional differences over time through divergent reactions to events. The authoritarian nature of Eastern Europe’s political institutions started hundreds of years ago and allowed rulers to have more power over the populace while Western European rulers were forced to concede greater rights to their serfs. While these authoritarian differences allowed for successful empire building in Russian and Austro-Hungarian societies, these differences doomed the region to the general economic stagnation seen today.
Politics determine everything
The final major premise coming out of Why Nations Fail is the influence between political and economic institutions. Simply put, Acemoğlu and Robinson theorize that the nature of political institutions (inclusive vs extractive) determine the nature of a nation’s economic institutions. Why? Historically speaking, the same people who ruled a country also led and benefited from its economy. This connection explains why monopolies and resistance to technological change remain consistent problems for developing countries. Those in power typically become the ‘losers’ in any type of inclusive institutional progress, and even though society prospers from inclusiveness, rulers will fight to protect their status and power.
An open market means that entrepreneurial individuals can become wealthy, which means that political opposition can finance themselves, which translates to influence, which translates to power, ad infinitum. Acemoğlu and Robinson convincingly argue that only when political institutions become inclusive can lasting change manifest in the political and economic systems of a nation. This problem creates the largest barrier to inclusive political and economic change in nations today.
One problem I consistently identified within Why Nations Fail appears at the end of most chapters. While I understand Acemoğlu and Robinson are trying to create an applicable and cohesive story for their theory of institutional development, the authors end up redundantly summarizing and rehashing previous arguments. Over time, Acemoğlu and Robinson created a lot of excess writing that they could of saved themselves from.
Additionally, using mathematical models and more empirical data would improve the validity of Acemoğlu and Robinson’s arguments. It is not because I think providing models and data is mandatory, but because this has become the norm for the field of economics, especially if you are proposing new theory.
As I previously stated, I am a big fan of new institutional economics, so bias becomes a real problem when reviewing Why Nations Fail. However, I legitimately believe that Acemoğlu and Robinson provide a strong historical analysis of political and economic development through their unique institutional framework. The amount of detail, cohesive theory, and overall effectiveness of argument makes Why Nations Fail an impressive volume for economic history. 4/5