From the financial collapse to Citizens United, America's recent past put it on a dangerous track.
In 1776, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. It was the heyday of the Enlightenment, when many European intellectuals believed they had unlocked the secrets to progress. According to the popular interpretation of Smith, human nature leads to prosperity. Pursuing our self-interest generates trade, cooperation, specialization, and productivity growth, so long as we are not impeded by irrational government policies such as trade barriers or state-sanctioned monopolies. Because free markets allocate resources efficiently, the government's most important job is to ensure a minimal set of rights and otherwise stay out of the way -- a central principle of the liberal Enlightenment political philosophy that helped inspire American democracy.
More than 200 years later, however, it is clear that human societies do not progress inevitably toward greater wealth. Creating the conditions in which self-interest will foster economic development is harder than optimistic Enlightenment thinkers believed. Economic growth is not predestined: Many countries have seen long-term declines in standards of living, as did Argentina in the twentieth century. Others, such as large parts of Africa, seem mired in strife and poverty. With even the United States and Western Europe facing economic stagnation, burdensome debt levels, unfavorable demographics, and rising global competition, it seems that sustained stability and prosperity may be the historical exception rather than the rule.
Why some societies stagnate while others thrive is the question addressed by economist Daron Acemoglu and political scientist James Robinson in Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Nogales, Arizona, is far richer than Nogales, Mexico, even though the two have similar demographics, cultures, and climates. South Korea and North Korea, indistinguishable only 70 years ago, now seem separated by centuries of economic development. In the Democratic Republic of the Congo, the Bushong on one side of the Kasai River are better off than the Lele on the other.
These differences, Acemoglu and Robinson argue, can all be explained by institutions. Long-lasting institutions, not short-term government policies, are the key determinant of societal outcomes. Development is not as simple as adopting a smarter set of economic policies: Instead, "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."
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In Why Nations Fail, Acemoglu and Robinson outline a theory of how economic and political institutions shape the fate of human societies. They reinterpret the rise and fall of civilizations throughout history, showing how differences in institutions interact with changing circumstances to produce development or stagnation. But this is not simply a book about history. It also has implications for the contemporary United States, where increasing inequality and the growing influence of money in politics threaten to reshape our political institutions.
Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people," write Acemoglu and Robinson. Extractive institutions, whether feudalism in medieval Europe or the use of schoolchildren to harvest cotton in contemporary Uzbekistan, transfer wealth from the masses to elites. In contrast, inclusive institutions -- based on property rights, the rule of law, equal provision of public services, and free economic choices -- create incentives for citizens to gain skills, make capital investments, and pursue technological innovation, all of which increase productivity and generate wealth. Economic institutions are themselves the products of political processes, which depend on political institutions. These can also be extractive, if they enable an elite to maintain its dominance over society, or inclusive, if many groups have access to the political process. Poverty is not an accident: "[P]oor countries are poor because those who have power make choices that create poverty." Therefore, Acemoglu and Robinson argue, it is ultimately politics that matters.
The logic of extractive and inclusive institutions explains why growth is not foreordained. Where a cohesive elite can use its political dominance to get rich at the expense of ordinary people, it has no need for markets and free enterprise, which can create political competitors. In addition, because control of the state can be highly lucrative, infighting among contenders for power produces instability and violence. This vicious circle keeps societies poor. In more fortunate countries, pluralistic political institutions prevent any one group from monopolizing resources for itself, while free markets empower a large class of people with an interest in defending the current system against absolutism. This virtuous circle, which first took form in seventeenth-century England, is the secret to economic growth.
Why Nations Fail makes this argument through dozens of case studies ranging from the Neolithic Revolution to contemporary China and passing by many corners of Latin America, Africa, and Southeast Asia. Although its core ideas were developed in a series of important academic papers examining the institutional conditions that give rise to economic development, the writing is accessible and free of jargon. The numerous examples and repetition of some central ideas can obscure the book's overall organization, but most chapters conclude with a short summary that helps the reader maintain her bearings. The attempt to explain every type of societal evolution in terms of extractive and inclusive institutions can make the argument seem reductive. But that is the point: Any important theory of how societies develop must explain a wide range of historical phenomena with a few key concepts.
Acemoglu and Robinson differentiate their account from alternatives that they label the "culture," "geography," and "ignorance" hypotheses. An example of the first is Max Weber's famous argument that Calvinism lay at the roots of capitalist development; the best-known recent example of the second is Jared Diamond's explanation of the Spanish Conquest as the inevitable outcome of geographic differences between Eurasia and the Americas. Most economists, Acemoglu and Robinson assert, subscribe to the ignorance hypothesis, according to which "poor countries are poor because they have a lot of market failures and because economists and policymakers do not know how to get rid of them." According to this view, development can be engineered through technocratic policies administered by enlightened experts.