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Why Nations Fail: The Origins of Power, Prosperity, and Poverty
Daron Acemoglu and James Robinson, Crown Business, 2012, 462 pp
Why Nations Fail begins with a description of Nogales Arizona and Nogales Mexico – a town divided by an international border.
The people share the same geography. Most share the same ethnicity, and often the same extended families. The U.S. side of the town is thriving.
The authors, Daron Acemoglu and James Robinson, claim that the differences are a result of the different political and economic institutions governing Mexico and the U.S.
For nations to succeed and be prosperous, political power must be broadly based in the people. There must be respect for private property, individual liberty, and the rule of law.
Without those political and economic institutions there will be no incentives for the lower orders to produce because whatever they produce will be taken from them and they will be left with virtually nothing.
In countries without those institutions the great mass of people cannot take advantage of economic opportunities. The only way to rise above poverty is to pander to those in political power.
The authors compare Carlos Slim and Bill Gates – two of the richest men in the world. Slim grew rich by acquiring government monopolies in telecommunication and then milking his customers who had no choice but to use his services. He had no competition and the only way he could have failed is if his government cronies turned on him.
Carlos Slim “extracted” wealth (a term the authors prefer) from Mexicans and shares that wealth with the elite who are in control of the country. He did nothing to add to the wealth of his nation.
In contrast, Bill Gates invented products and sold them to people who wanted them and had to survive competition. Bill Gates added to the wealth of Americans and to the wealth of people around the world. Bill Gates may not be a better man than Carlos Slim but he has bettered the lives of many millions of people.
Whatever their ideology, socialist or free market, look at how the people who hold the political power act. If they use that political power to give economic power to their friends, preserve monopolies, and make companies too big to fail, then sooner rather than later that nation will fail.
In Africa the colonial powers exploited the people in the name of colonialism and capitalism. They were replaced by indigenous rulers, who, socialist egalitarian ideology not withstanding, continued to use the same extractive institutions to impoverish the people and enrich themselves.
The authors concede that for a limited time an extractive dictatorial power can grow the economy, but since the enterprises owned by the politically powerful are never allowed to fail, they have no incentive to be self-correcting. Creative destruction is necessary for prosperity. Unsurprisingly the authors predict that China’s economic growth cannot last.
The book is rich with examples of settled and successful nations actually rejecting their technological advantages in order for the ruling classes to protect themselves from competition.
The people must be kept ignorant and unable to challenge those in power. In general, free markets and technological advances threaten the power of those with entrenched monopolies.
In 1485 printing was outlawed in the Ottoman empire; later American slaveholders made it illegal to teach blacks to read. China, in 1400, was technologically advanced and prosperous.
Then the absolutist government banned seafaring, and most new technological advances. In a matter of a few generations most Chinese were living in abject poverty. The Russians Czars refused to have railroads built because they offered more freedom to the lower classes.
The authors display an almost encyclopedic historical and economic knowledge. The book offers hundreds of examples of such opposition to technological development around the world. That breadth of knowledge is a mixed blessing.
As extremely well-regarded research economists, Acemoglu and Robinson are committed to the relatively new field of institutional economics, but no economic theory, on its own, can explain everything and the authors try to do too much with too limited a theory.
Nor do the authors point out our government with its increasing reliance on granting monopolies, over regulating industries, and picking winners may be moving in the direction of poverty and failure. They are very careful not to offend American academia.
Still, for the sheer scope of the enterprise, Why Nations Fail is well worth the reader’s time and effort.
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