Failure and Success (2013)

Book Review from the July 2013 issue of the Socialist Standard

Why Nations Fail: the Origins of Power, Prosperity and Poverty, by Daron Acemoglu and James Robinson. Profile, £10.99

Why do some countries have a higher standard of living for most of their population than others have? The authors’ answer relies on a distinction between inclusive and extractive institutions at both the political and economic level. For further discussion of the book and replies to reviews, see whynationsfail.com.

Politically, inclusive institutions are both centralised and pluralistic. This means, firstly, that they involve sufficient power of coercion in state hands to defend law and order and enforce property rights; this is in contrast to chaotic countries such as Somalia, which lack any true government power (they are sometimes called anocracies). Secondly, power is spread around to some extent rather than being concentrated in the hands of a few, whether a monarch and aristocracy or a dictator and his cronies. Extractive political institutions are either non-pluralistic or non-centralised. Economically, inclusive institutions foster productive activity and innovation rather than (as extractive institutions do) siphoning off wealth for the benefit of a small clique and stifling new ideas and developments as a challenge to the status quo.

There is claimed to be a ‘synergy’ between economics and politics in that inclusive and extractive types tend to go together. But ‘it is politics and political institutions that determine what economic institutions a country has.’ Economic growth is more likely under inclusive institutions; it is possible under extractive ones but is likely to be short-lived, as in the former ‘Soviet’ Union and today’s China (where the authors predict that either the country will become more pluralistic or the growth will peter out). The richer countries nowadays are those that began industrialisation in the nineteenth century, while the poorer ones did not.

The book contains a number of instructive case studies, which we cannot discuss properly here. Let’s just look at a couple. In 1945 the two parts of Korea were pretty similar, but then extractive institutions in the North led to stagnation and starvation, while South Korea adopted inclusive institutions and became an economic powerhouse, home to global corporations such as Samsung. Acemoglu and Robinson accept that the South was not a democracy and had ‘authoritarian presidents’, but they massively understate the extent of the dictatorship there (such as torturing strikers and firing on demonstrators) and also the amount of US support and investment. So there is little evidence from South Korea for the determining force of politics.

The Industrial Revolution is always a crucial issue in such broad-scope histories. In 1589 Elizabeth I refused a patent for a kind of knitting machine on the grounds that the introduction of such technology would lead to wide-scale impoverishment; in fact, she was probably afraid of any resulting instability and its threat to her status. But the Glorious Revolution of 1688 ended this concentration of monarchical power and gave much more say to the rising merchant and capitalist classes. From the middle of the eighteenth century many technological innovations were introduced in Britain as the Industrial Revolution took off. As the authors see it, the events of 1688 created inclusive political institutions, and these underpinned the inclusive economic institutions of property rights and efficient financial markets. But they are well aware that even the forms of democracy were very limited at the time, and that the capitalist class were able to use their new power to have textile imports from India banned. As this last example shows, inclusive institutions can be used to defend the interests of a small class of factory owners and to constrain production elsewhere.

In fact the whole idea of the institution types is not as straightforward as the authors seem to think. It is argued that inclusive economic institutions ‘allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish’. It is hard to see how this fits any version of capitalism, since most people are forced to take dead-end or menial jobs (if they can find them) that make scant use of their skills, and so they have little choice in how they live their lives. Inclusive institutions benefit the capitalist class in general, not those who perform the labour that makes the owners wealthy.

Paul Bennett