"Why Nations Fail"

On my recent cruise to Asia, Australia and the South Pacific I read Why Nations Fail –The Origins of Power, Prosperity, and Poverty, a new book by Daron Acemoglu and James A. Robinson. Acemoglu is a Professor of Economics at MIT. Robinson is a Professor of Government at Harvard University. I recommend that anyone that cares about the fundamental relationship between political systems and economic development read this book. This is one of the most thought provoking books I have ever read. The history of the world is clear. There is only one political/economic path to very long term continuous economic development. There are many political/economic paths that will lead to temporary economic development. There are also political/economic paths that will prevent economic development from ever happening.

When I first heard about this book I wondered what the title meant. Did it mean a nation was successful and then failed? Certainly, the Roman Empire and many other ancient civilizations would qualify. Or did it mean why do some nations never develop? There are cultures in Africa that certainly meet this definition. What I came to find out while reading the book is that it meant both types of failure and there were other types of failure as well.

I have never read any book that carefully addresses the political environment that supported successful economic development or the opposite, the political environment that suppressed economic development. Why Nations Fail addresses both situations. After reading this book one has to reevaluate much of what we have learned about world history.

The authors present examples from all corners of the world and from many different periods of history. Why did some cultures succeed and many fail? Why have some cultures never succeeded by any reasonable definition. The answers will become much clearer after you read Why Nations Fail. We need to reevaluate much of the United States government’s current foreign policy. As I reached the end of the book, I kept asking myself, what the heck is our government doing?

I am going to summarize some of the key concepts of the book and some of my conclusions in my commentary. Readers may say that I am not backing up my analysis with supporting examples. If my summary is interesting to you I suggest you read the book and compare your conclusions to the authors and my own.

The fundamental determination of the long term potential of a society is the extent that its political and economic institutions are inclusive or extractive.

“Inclusive economic institutions are those that 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. 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.” “Political institutions that are sufficiently centralized and pluralistic” are “inclusive political institutions”.

“When either of these conditions fails, we will refer to the institutions as extractive political institutions.” “Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions are then often structured by this elite to extract resources from the rest of the society. Extractive economic institutions thus naturally accompany extractive political institutions”.

Economic growth is possible in extractive economic systems for extended periods of time but eventually, the political system will become unstable and either the political system will become inclusive or the economy will fail to grow.

Economic creative destruction is a critical element of an inclusive economic system. Barriers put in place by the establishment to prevent or slow down creative destruction will have a major negative impact on economic growth.

The era of European colonialism was one of the most destructive periods in the history of the world. More damage was done to societies outside of Europe than any benefit that was created for Europeans.

The industrial revolution moved forward faster in England than in other nations due to its long term evolution of a more inclusive political system. While England's political system was not fully inclusive, it was sufficiently broad based to allow the Industrial Revolution to progress. England was the only nation on earth that had a political system that would support the development of the Industrial Revolution at the time it began.

The United States became the world's most powerful nation and strongest economy because it developed the most inclusive political system in the world at an optimum time in history by building on the foundations created in England.

Deng Xiaoping was the most important political leader in the world during the last 25 years of the 20th Century. His reshaping of the economy of China has transformed the world economy in ways that were never anticipated. It remains to be seen if China’s current political system will be sufficiently stable for China to continue its growth in the very long term.

It is not clear that cultures that are based on power residing with clans, tribes or small religious groups can ever develop economically in comparison with the rest of the world. It is doubtful they will ever develop the political systems needed for broad based economic development.

Any society that willingly allows itself to be controlled by a dictator and ruling elite deserves the extractive economy that results. The only path to an inclusive society is a revolution that removes the dictator and installs a reasonably inclusive political system. People that live under a dictator must ask themselves a fundamental question; Is life under a dictator a life worth living or is it worth dying in an attempt to change the political system?

Almost all foreign aid by the United States government and other western governments is a complete waste of expenditures. The vast majority of resources given to any nation that has extractive political and economic systems will not reach the people it is intended to help. Are we using the wrong term for foreign aid? Is it really a form of tribute where the United States is paying for certain behaviors by a government? When has the paying of tribute served the long term interests of any nation? The United States should end all foreign aid and payment of tribute to foreign governments.

Is the United States on a path that makes its political and economic institutions more inclusive or extractive? $16 Trillion of Federal Debt, an annual budget deficit of $1Trillion plus and at least $100 Trillion of unfunded long term liabilities has been created by a variety of factions within the United States that desire to extract wealth from certain groups and transfer it to other groups within our society.

I highly recommend you read Why Nations Fail.