Why Natons Fail is the the most important book about the rise and fall of  nations and peoples since Jared Diamond's  Collapse, and  Guns, Germs and Steel, which were the most provocative books on the subject since Frederick Engles'  The Origin of the Family, Private Property,  and the State. 

Daron Acemoglu is the Killian Professor of Economics at MIT. In 2005 he received the John Bates Clark Medal awarded to economists under forty judged to have made the most significant contribution to economic thought and knowledge.  Many winners of this award eventually win a Nobel prize, too.  James A. Robinson, a political scientist and an economist, is the David Florence Professor of Government at Harvard University. A world-renowned expert on Latin America and Africa, he is currently conducting research in the Democratic Republic of the Congo, Sierra Leone, Haiti and in Colombia where he has taught for many years during the summer at the University of the Andes in Bogotá.

Why Nations Fail strives to answer the question that has challenged and usually confounded experts, researchers and policy - makers for centuries: Why are some nations rich and others poor, divided by wealth and poverty, health and sickness, food and famine?

Is it culture, the weather, geography? Perhaps ignorance of what the right policies are?

Simply, argue the authers,  no. None of these factors is either definitive or destiny. Otherwise, how to explain why Botswana has become one of the fastest-growing countries in the world, while other African nations, such as Zimbabwe, the Congo, and Sierra Leone, are mired in poverty and violence? Drawing on detailed and  original research over a 15 year period, Acemoglu and Robinson survey the histories of the Roman Empire, the Mayan city-states, medieval Venice, the Soviet Union, Latin America, England, Europe, the United States, and Africa to build a new theory of political economy with  relevance for the big questions of today, including:

• China has built an authoritarian growth machine. Will it continue to grow at such high speed?
• Do inequality trends in the US portend a reversal of a 250 year tendency toward more inclusive political institutions? Are we moving away from a virtuous circle of expanding empowerment and toward one in which efforts by elites to aggrandize power create  a vicious circle that enriches and empowers a small minority?
• What is the most effective way to help move billions of people from the rut of poverty to prosperity? More philanthropy from the wealthy nations of the West? Or learning the hard-won lessons of Acemoglu and Robinson’s  ideas on the interplay between inclusive political and economic institutions?

Marxists have a set of categorical expressions such as class, state,  means of production, 'objective' conditions, political superstructure, surplus value and others used to describe a political economy that can explain economic and social development. Most derive deductively from Marx's original and careful definition of a 'commodity', a definition with precise economic and philosophical dimensions,  buttressed by 20 years of research at the British Museum into the history of the industrial revolution and the rise of capitalism in Britain.

Acemoglu and Robinson come from mainstream macro-economic traditions. But have striven to avoid a lot of well-worn expressions of their own disciplines, nevermind Marxist ones. Instead they develop elements of a new vocabulary to help understand the patterns and narratives that emerge from the vast data on the rise and fall of nations and civilizations they analyze. The most important of these concepts are: extractive and inclusive economic and political institutions,  critical junctures, and creative destruction (the last borrowed from Marx via the economist Joseph Schumpeter).  Avoiding or minimizing use of standard vocabularies is one way  of allowing the data to speak for itself anew. Researchers have access to truly vast data stores in the information era compared to previous generations.

Extractive and Inclusive Economic and Political Institutions

All economic institutions are created by society....politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups ... will be much better off by setting up institutions that are extractive. When there is a conflict over institutions, what happens depends on which people or group wins out in the game of politics ---who can get more support, obtain additional resources, and form more effective alliances. In short, who wins depends on the distribution of political power....If the distribution of power is narrow and unconstrained, then the political institutions are absolutist, as exemplified by the absolutist monarchies reigning throughout the world during much of history. Under absolutist political institutions ... those who can wield this power will be able to set up economic institutions to enrich themselves and augment their power at the expense of society. In contrast, political institutions that distribute power broadly in society and subject it to constraints are pluralistic. Instead of being vested in a single individual or or a narrow group, political power rests with a broad coalition or a plurality of groups.

There is a close connection between pluralism and inclusive economic institutions. However the connection is more complex than can be captured in a phrase.  For example, in the East African nation of Somalia, political power has long been widely distributed---almost pluralistic. Indeed there is no real authority that can control or sanction what anyone does. The distribution of power in this case leads not to inclusive institutions, but to chaos. No meaningful economic activity, trade, or basic security can develop without political centralization. The key to all examples of sustained progress is in combining political centralization with inclusiveness.

Some may object that the expressions "extractive" and "inclusive" are arbitrary; for example, the above definition of extractive at first glance may be little more than saying "extractive means extractive". However the accumulation of historical evidence the authors bring to bear on their subject gives the terms great depth by the book's end. The evidence would have even greater "depth" if examples included the very "extractive" relationship between corporations and workers throughout the history of capitalism. However, the larger points on the synergy between economic and political institutions in every society are clearly made.  The cumulative research  discussed powerfully argues that inclusive institutions stimulate more sustainable innovation and growth than extractive ones. The latter also can generate growth -- but for a much shorter duration and with greater political instability. On almost every dimension of democratic struggle, especially labor rights,  the advantages of greater democratization and broader empowerment -- inclusiveness -- are reaffirmed by the historical record. 

One weakness in the authors' analysis is some relative lack of attention to the technological foundations for levels of mass culture that truly make "inclusiveness" possible. But the volume of data mediates this weakness.

The advance of technology and science makes tension between political and economic institutions inevitable in every nation. New technologies replace old, forge new divisions of labor, create new jobs and destroy old ones -- developments that have serious political consequences for elites at all levels. Which brings us to the concept of creative destruction. The ability of a society to maintain inclusiveness depends on its skill -- and sometimes luck -- at managing the powerful forces behind creative destruction.

Creative Destruction

The fundamental problem is that there will necessarily be disputes and conflict over economic institutions...the economic growth which can be induced by institutions creates both winners and losers. This was clear during the industrial revolution in England, which laid the foundations of the prosperity we see in the rich countries of the world today.... Even though mechanization led to enormous increases in total incomes and ultimately became the foundation of modern industrial society, it was bitterly opposed by many. Not because of ignorance or shortsightedness; quite the opposite. Rather, such opposition to economic growth has its own, unfortunately coherent, logic. Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.

Mainstream economics has always been to some extent hamstrung by its aversion --- a better term, in this writer's view, would be simply "fear" -- of Marx. Schumpeter's creative destruction ideas were explicitly derived from Marx's early writing -- for example this famous paragraph from the Communist Manifesto:

The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.

Nonetheless, creative destruction is a process that invades every economic and political system in history -- slavery, feudalism, capitalism and socialism. It must be mastered and accommodated or it will certainly eventually tear a society up. How fast it operates varies with the pace of technological change, its midwife.  But it cannot be denied indefinitely. It is the bane and ultimate ruin of extractive regimes and institutions.

Critical Junctures

When I used the term "luck" above no joke is intended. Throughout history not only general laws and tendencies are at work. Each nation that evolved over the centuries following the Roman Empire's collapse was shaped by some unique geographic, cultural, historical and environmental characteristics.  At the time of England's defeat of the Spanish Armada -- a completely unexpected event given the large superiority of the Spanish navy with respect to England's naval resources --- pure chance guided the outcome. Spain had riches in gold and silver from its colonization of the New World, which it invested in its armed forces.  England had to tax its Barons to pay for ships. Its colonies and native peoples had no gold. Nonetheless the alliance with broader sections of the landed aristocracy AND commercial interests compelled England to adopt a number of small steps toward inclusiveness and away from absolutism. These steps later proved critical in permitting the more rapid spread of industrialization, democracy and the rise of England as the dominant world economic power from then until World War II.

The Black Death was such a critical juncture: An externality to the existing system of institutional  relations that compels a rapid change in institutions to adapt or survive.  The Black Death began the decline of feudalism in Western Europe, while feudal institutions in Eastern Europe entered the Second Serfdom.   Minor differences in institutions resulted in very different pressures and outcomes from the massive scarcity of labor created by the plague. Peasant rebellions against longstanding fines and levies were successful in the west.  In England the attempt by the state to stop the changes of institutions and wages that came in the wake of the Black Death did not work. In 1381 the Peasants' Revolt broke out, and the rebels, under the leadership of Wat Tyler,  captured most of London. Though eventually defeated, there were no more efforts to enforce the hated Statute of Laborers.

The discovery of the Americas was also a critical juncture. The response of nations varied sometimes only in degrees, but the differences later led to substantial divergences in development. No two nations have identical institutions. At critical junctures, minor divergences can determine an entirely new historical path.

Institutional Analysis and the USSR

Why Nations Fail surveys many countries and transitions. However, it devotes nearly an entire chapter applying the extractive vs inclusive institutional analysis model to the birth and collapse of the USSR, a subject of interest to many readers of this online journal. The flavor of Acemoglu and Robinson's approach can be seen this narrative. Some excerpts:

* Growth under extractive regimes:

Institutional differences play the critical role in explaining economic growth through the ages. But if most societies in history are based on extractive political and economic institutions, does this imply that growth never takes place? Obviously not. Extractive institutions...must create wealth so that it can be extracted. ..but growth under extractive institutions differs in nature from growth brought forth by inclusive institutions. Most important it will not be sustained growth that requires technological change, but rather growth based on existing technologies. The economic trajectory of the Soviet Union provides a vivid illustration of how the authority and incentives provided by the state can spearhead rapid economic growth under extractive institutions and how this type of growth ultimately comes to an end and collapses.

* Development Under Stalin.

...by 1927 Joseph Stalin had consolidated his grip on the country. He purged his opponents and launched a drive to rapidly industrialize the country. He did it via energizing the state planning committee, Gosplan, which had been founded in 1921. Gosplan wrote the first Five-Year Plan, which ran between 1928 and 1933. Economic growth, Stalin style, was simple: develop industry by government command and obtain the necessary resources for this by taxing agriculture at very high rates....the state did not have an effective tax system, so instead Stalin "collectivised" agriculture. this process entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run directly by the Communist Party.

...It sounds like a recipe for disaster and stagnation, if not outright collapse. When the state or narrow elite controls all resources, neither the right incentives will be created nor will there be an efficient allocation of the skills and talents of the people. But in some instances the productivity of labor and capital may be so much higher in one sector or activity, such as heavy industry in the Soviet Union, that even a top down process under extractive institutions that allocates resources toward that sector can generate substantial growth.

*Conclusion

... The fact that truly effective incentives could not be introduced in the centrally planned economy was not due to technical mistakes in the design of the bonus schemes. It was intrinsic to the whole method by which extractive growth had been achieved. It had been done by government command, which could not solve some basic economic problems.  It could not manage creative destruction and the deployment of technological innovation in production....[to fix the problems] the Soviet Union would have to abandon extractive economic institutions, but such a move would have jeopardized their political power. Indeed, when Mikhail Gorbachev started to move away from extractive economic institutions after 1987, the power of the communist Party crumbled, and with it, the Soviet Union.

 These conclusions will be controversial and painful to some -- but the essential economic narrative will be difficult to refute.  Readers looking for pat answers will not find them in Acemoglu and Robinson.  Their model has the virtue of rendering no final verdict on the debate between Left and Right, capitalism and communism. Instead they challenge all with their determination to find harmony between the ideals of democracy and economic progress,  and offer a new vocabulary to help shed light on themes that have deep currents throughout human history.

Its a great read -- check it out.