Why Nations Fail by Daron Acemoglu and James Robinson

For all dedicated macro economists and anyone who wants some good news as to the future of the United State’s economy, Why Nations Fail is a book that I highly recommended for you. Why Nations Fail: The Origins of Power, Prosperity, and Poverty is a new book by Daron Acemoglu and James Robinson. Daron Acemoglu is the Killian Professor of Economics at MIT and James Robinson is the David Florence Professor of Government at Harvard University.

This delightful book is the most extensively researched and easy to follow ‘pure’ economics book that I have read. I classify this as a ‘pure’ economics books as opposed to the recent and popular behavioral economics books, such as those by Steven Levitt (see Freakonomics: A Rogue Economist Explores the Hidden Side of Everything), which themselves are also well researched and written but focus on topics more familiar to a larger number  of readers. The goal of Why Nations Fail is to explain just that; why some nations fail while others succeed. This goal is obtained by providing very simple concepts supported by an abundance of historical and modern day case studies.

Don’t worry if you are an economics novice, Why Nations Fail does not require any pre-requisite degrees, classes or knowledge of economics!

The book opens with a brief account of the recent events in Egypt. As we are all aware, the citizens of Egypt have not been happy with their plight and have recently risen up to precipitate changes within the government. The interesting question that only time will answer is will a regime change in Egypt lead to any increased prosperity for its citizens? This book explores the factors that will determine the fate of Egyptians.

The authors begin by providing evidence which dispels several common theories that are thought to explain why some nations succeed while others fail. These dispelled theories include factors that have been previously claimed to be determinates of success or failure such as: geography/climate, culture/religion, and bad decisions made by national leaders.

Although many historical examples are provided to dispel these theories one of the best cases is the city of Nogales. This city is basically split in half, with half in Arizona (USA) and the other half in Mexico. We see that even though Nogales is in a relatively prosperous part of Mexico, its residences are not nearly as well off as their counterparts in the Arizona side of the city. It is easy to see that the climate and geography would be the same for part parts of the city. Not as easy to see but equally as important is the knowledge that the settlers of both parts of the city were from the same culture. Clearly there are other factors that are influencing the differences in prosperity between the two halves of Nogales.

The authors then present their own theories and supporting evidence to explain why some nations fail while others succeed.  The resulting theory is very simplistic; countries with inclusive political and economic institutions will flourish while those with extractive political and economic institutions will ultimately fail.

In inclusive institutions citizens have a say in their government, enjoy secure rights to property and experience both freedom and low barriers to entrepreneurism.  A strong centralized government is needed to provide these advantages. On the other hand, extractive institutions put up barriers to entrepreneurism, limit technology advances and are basically a burden to its citizens. Extractive institutions are typically led by small groups (warlords) or individuals whose main goal is to increase their own personal wealth and power at the expense of citizens.

Over time every nation faces critical junctures during which decisions will be made that ultimately determine if institutions will shift more towards inclusion or extraction (and ultimately succeed or fail). Many examples of these critical junctures are provided in the book in great detail and include; The Black Death, the opening of trade routes across the Atlantic, and the industrial revolution. The authors provide accounts of several fascinating critical junctures that occurred in the United States including the Civil War, FDR’s attempt to alter the Supreme Court and when Rosa Parks refused to give up her bus seat.

Based on many case studies we see that leaders of extractive institutions have blocked technology advances, such as printing presses, railroads, and even Facebook, for fear of a loss in their power base. This introdues the concept of the vicious circles which explains how nations caught in extractive institutions will find it very difficult to shift to a more inclusive environment. Alternatively, nations with inclusive institutions tend to remain inclusive based on the virtuous circle theory.

The authors also explore examples of nations that may have an inclusive economy while maintaining an extractive political institution. The best case study provided for this is modern China. China has of course exploded in productivity since the Cultural Revolution mainly by adapting a less extractive economy. Business leaders have more freedom to determine their production and work with the government in these areas. On the other hand we have not seen that the political institutions in China have become any less extractive. The authors warn that if this course is not changed China will not be able to maintain its current growth.

I have only been able to touch on a sampling of the many theories and case studies that are provided in this book. Many of these historical examples are from several thousand years ago - very impressive research! Based on the tremendous amount of evidence provided I am convinced that the authors are on target with their theories. The theories of extraction and inclusion, though they sound very simple, may be the main key to understanding the differences between successful and unsuccessful nations.

It is also very encouraging to understand that as long as the United States continues to promote inclusive institutions our long term prosperity will be secure.

So what will happen in Egypt? Too many historical cases show that governments that promote extractive institutions are sometimes overthrown by people who ultimately want the power and wealth for themselves and not for the citizens, leading to even more extractive institutions. We can only hope that the leaders emerging in Egypt will begin working towards creating more inclusive institutions.