Why Nations Fail: FROM THE WINNERS OF THE NOBEL PRIZE IN ECONOMICS: The Origins of Power, Prosperity and Poverty

by Daron Acemoğlu

This book will show that while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.

The first country to experience sustained economic growth was England

Growth emerged slowly in the second half of the eighteenth century as the Industrial Revolution, based on major technological breakthroughs and their application in industry, took root.

In England, industrialization marched on, despite the Luddites’ opposition, because aristocratic opposition, though real, was muted. In the Austro-Hungarian and the Russian empires, where the absolutist monarchs and aristocrats had far more to lose, industrialization was blocked. In consequence, the economies of Austria-Hungary and Russia stalled. They fell behind other European nations, where economic growth took off during the nineteenth century.

The attempt by the English state to stop the changes of institutions and wages that came in the wake of the Black Death didn’t work. In 1381 the Peasants’ Revolt broke out, and the rebels, under the leadership of Wat Tyler, even captured most of London. Though they were ultimately defeated, and Tyler was executed, there were no more attempts to enforce the Statute of Laborers. Feudal labor services dwindled away, an inclusive labor market began to emerge in England, and wages rose.

Though in 1346 there were few differences between Western and Eastern Europe in terms of political and economic institutions, by 1600 they were worlds apart. In the West, workers were free of feudal dues, fines, and regulations and were becoming a key part of a booming market economy. In the East, they were also involved in such an economy, but as coerced serfs growing the food and agricultural goods demanded in the West.

It was a market economy, but not an inclusive one. This institutional divergence was the result of a situation where the differences between these areas initially seemed very small: in the East, lords were a little better organized; they had slightly more rights and more consolidated landholdings. Towns were weaker and smaller, peasants less organized. In the grand scheme of history, these were small differences. Yet these small differences between the East and the West became very consequential for the lives of their populations and for the future path of institutional development when the feudal order was shaken up by the Black Death.

This changed after the Glorious Revolution. The government adopted a set of economic institutions that provided incentives for investment, trade, and innovation. It steadfastly enforced property rights, including patents granting property rights for ideas, thereby providing a major stimulus to innovation.

The English state aggressively promoted mercantile activities and worked to promote domestic industry, not only by removing barriers to the expansion of industrial activity but also by lending the full power of the English navy to defend mercantile interests.

The full force of this revolution came from the market that created profitable opportunities for technologies to be developed and applied.

This letter reveals two things. First, Watt was motivated by the market opportunities he anticipated, by the “considerable demand” in Great Britain and its plantations, the English overseas colonies. Second, it shows how he was able to influence Parliament to get what he wanted since it was responsive to the appeals of individuals and innovators.

English political institutions were on their way to much greater pluralism by 1688, compared with those in France and Spain, but if we go back in time one hundred years, to 1588, the differences shrink to almost nothing. All three countries were ruled by relatively absolutist monarchs: Elizabeth I in England, Philip II in Spain, and Henry II in France. All were battling with assemblies of citizens—such as the Parliament in England, the Cortes in Spain, and the Estates-General in France—that were demanding more rights and control over the monarchy. These assemblies all had somewhat different powers and scopes. For instance, the English Parliament and the Spanish Cortes had power over taxation, while the Estates-General did not. In Spain this mattered little, because after 1492 the Spanish Crown had a vast American empire and benefited massively from the gold and silver found there. In England the situation was different. Elizabeth I was far less financially independent, so she had to beg Parliament for more taxes. In exchange, Parliament demanded concessions, in particular restrictions on the right of Elizabeth to create monopolies. It was a conflict Parliament gradually won. In Spain the Cortes lost a similar conflict. Trade wasn’t just monopolized; it was monopolized by the Spanish monarchy.

Elizabeth I and her successors could not monopolize the trade with the Americas. Other European monarchs could. So while in England, Atlantic trade and colonization started creating a large group of wealthy traders with few links to the Crown, this was not the case in Spain or France. The English traders resented royal control and demanded changes in political institutions and the restriction of royal prerogatives. They played a critical role in the English Civil War and the Glorious Revolution. Similar conflicts took place everywhere. French kings, for example, faced the Fronde Rebellion between 1648 and 1652. The difference was that in England it was far more likely that the opponents to absolutism would prevail because they were relatively wealthy and more numerous than the opponents to absolutism in Spain and France.

It was only in a few cases, societies such as Botswana (see pages 404–414), that critical junctures were used to launch a process of political and economic change that paved the way for economic growth.

Modern Anglo-Saxon surnames such as Baker, Cooper, and Smith are direct descendants of hereditary occupational categories. Bakers baked, coopers made barrels, and smiths forged metals. But these categories were never as rigid as Indian caste distinctions and gradually became meaningless as predictors of a person’s occupation.

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 growth.

Conflict resolution was probably much harder for sedentary groups, since disagreements could be resolved less easily by people or groups merely moving away. Once people had built permanent buildings and had more assets than they could carry, moving away was a much less attractive option. So villages needed more effective ways of resolving conflict and more elaborate notions of property. Decisions would have to be made about who had access to which piece of land close to the village, or who got to pick fruit from which stand of trees and fish in which part of the stream. Rules had to be developed, and the institutions that made and enforced rules had to be elaborated.

The growth generated by extractive institutions is very different in nature from growth created under inclusive institutions, however. Most important, it is not sustainable.

Egypt lasted longer than any modern society

China under the rule of the Communist Party is another example of society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.

Roman decline led to feudalism, which, as a by-product, caused slavery to wither away, brought into existence cities that were outside the sphere of influence of monarchs and aristocrats, and in the process created a set of institutions where the political powers of rulers were weakened.

In 1990–1992 the Greenland Ice Core Project drilled down through 3,030 meters of ice covering about 250,000 years of human history. One of the major findings of this project, and others preceding it, was that there was a distinct increase in atmospheric pollutants starting around 500 BC. Atmospheric quantities of lead, silver, and copper then increased steadily, reaching a peak in the first century AD. Remarkably, this atmospheric quantity of lead is reached again only in the thirteenth century. These findings show how intense, compared with what came before and after, Roman mining was. This upsurge in mining clearly indicates economic expansion.

Early on in the Republic, they created others: cement masonry, pumps, and the water wheel.

There are two interesting things about this story. First, the man went to Tiberius in the first place for a reward, rather than setting himself up in business and making a profit by selling the glass. This shows the role of the Roman government in controlling technology. Second, Tiberius was happy to destroy the innovation because of the adverse economic effects it would have had. This is the fear of the economic effects of creative destruction.

As we will see many times in this book, economies based on the repression of labor and systems such as slavery and serfdom are notoriously noninnovative.

Feudalism also created a power vacuum in which independent cities specializing in production and trade could flourish.

In fact, as we saw in chapter 1, these densely settled civilizations interacted in a perverse way with European colonialism to create a “reversal of fortune,” making the places that were previously relatively wealthy in the Americas relatively poor. Today it is the United States and Canada, which were then far behind the complex civilizations in Mexico, Peru, and Bolivia, that are much richer than the rest of the Americas.

As we will see in the next two chapters, small institutional differences would be the ones that would really matter within Europe; and these favored England, because it was there that the feudal order had made way most comprehensively for commercially minded farmers and independent urban centers where merchants and industrialists could flourish.

IN 1583 WILLIAM LEE returned from his studies at the University of Cambridge to become the local priest in Calverton, England. Elizabeth I (1558–1603) had recently issued a ruling that her people should always wear a knitted cap. Lee recorded that “knitters were the only means of producing such garments but it took so long to finish the article. I began to think. I watched my mother and my sisters sitting in the evening twilight plying their needles. If garments were made by two needles and one line of thread, why not several needles to take up the thread.”

The Peasants’ Revolt of 1381

Political power was being redistributed not simply from the king to the lords, but also from the elite to the people.

In the economy, extractive institutions manifested themselves not just in the opposition to Lee’s invention, but in the form of monopolies, monopolies, and more monopolies. In 1601 a list of these was read out in Parliament, with one member ironically asking, “Is not bread there?” By 1621 there were seven hundred of them. As the English historian Christopher Hill put it, a man lived in a house built with monopoly bricks, with windows . . . of monopoly glass; heated by monopoly coal (in Ireland monopoly timber), burning in a grate made of monopoly iron . . . He washed himself in monopoly soap, his clothes in monopoly starch. He dressed in monopoly lace, monopoly linen, monopoly leather, monopoly gold thread . . . His clothes were held up by monopoly belts, monopoly buttons, monopoly pins. They were dyed with monopoly dyes. He ate monopoly butter, monopoly currants, monopoly red herrings, monopoly salmon, and monopoly lobsters. His food was seasoned with monopoly salt, monopoly pepper, monopoly vinegar . . . He wrote with monopoly pens, on monopoly writing paper; read (through monopoly spectacles, by the light of monopoly candles) monopoly printed books.

In 1623 Parliament scored a notable victory by managing to pass the Statute of Monopolies, which prohibited James I from creating new domestic monopolies. He would still be able to grant monopolies on international trade, however, since the authority of Parliament did not extend to international affairs. Existing monopolies, international or otherwise, stood untouched.

From then on Parliament was firmly in control of state policy. This made a huge difference, because the interests of Parliament were very different from those of the Stuart kings. Since many of those in Parliament had important investments in trade and industry, they had a strong stake in enforcing property rights. The Stuarts had frequently infringed on property rights; now they would be upheld. Moreover, when the Stuarts controlled how the government spent money, Parliament opposed greater taxes and balked at strengthening the power of the state. Now that Parliament itself controlled spending, it was happy to raise taxes and spend the money on activities that it deemed valuable. Chief among them was the strengthening of the navy, which would protect the overseas mercantile interests of many of the members of Parliament.

But there were other ways to influence Parliament and thus economic institutions. The most important was via petitioning, and this was much more significant than the limited extent of democracy for the emergence of pluralism after the Glorious Revolution. Anybody could petition Parliament, and petition they did. Significantly, when people petitioned, Parliament listened. It is this more than anything that reflects the defeat of absolutism, the empowerment of a fairly broad segment of society, and the rise of pluralism in England after 1688.

The story of Papin’s invention is another example of how, under extractive institutions, the threat of creative destruction impeded technological change. Papin developed a design for a “steam digester” in 1679, and in 1690 he extended this into a piston engine. In 1705 he used this rudimentary engine to build the world’s first steamboat. Papin was by this time a professor of mathematics at the University of Marburg, in the German state of Kassel. He decided to steam the boat down the river Fulda to the river Weser. Any boat making this trip was forced to stop at the city of Münden.

It was the Glorious Revolution that strengthened and rationalized property rights, improved financial markets, undermined state-sanctioned monopolies in foreign trade, and removed the barriers to the expansion of industry. It was the Glorious Revolution that made the political system open and responsive to the economic needs and aspirations of society.

In England, even before the conflicts of the seventeenth century, the norm was established that the king could not raise new taxes without the consent of Parliament.

one crucial way in which this influenced future institutional dynamics depended on whether or not the Crown was able to monopolize this trade. In England the somewhat greater power of Parliament meant that the Tudor and Stuart monarchs could not do so. This created a new class of merchants and businessmen, who aggressively opposed the plan to create absolutism in England. By 1686 in London, for example, there were 702 merchants exporting to the Caribbean and 1,283 importing. North America had 691 exporting and 626 importing merchants. They employed warehousemen, sailors, captains, dockworkers, clerks—all of whom broadly shared their interests.

The same forces were at work in France, Spain, and Portugal. But there the kings were much more able to control trade and its profits. The type of new group that was to transform England did emerge in those countries, but was considerably smaller and weaker.

As with the English Parliament, the Castilian Cortes needed to be summoned to assent to new taxes. Nevertheless, the Cortes in Castile and Aragon primarily represented the major cities, rather than both the urban and rural areas, as the English Parliament did. By the fifteenth century, it represented only eighteen cities, each of whom sent two deputies. In consequence, the Cortes did not represent as broad a set of groups as the English Parliament did, and it never developed as a nexus of diverse interests vying to place constraints on absolutism.

In 1520 Charles V decided to present the Cortes with demands for increased taxation. Urban elites used the moment to call for much wider change in the Cortes and its powers. This opposition turned violent and quickly became known as the Comunero Rebellion. Charles was able to crush the rebellion with loyal troops. Throughout the rest of the sixteenth century, though, there was a continuous battle as the Crown tried to wrest away from the Cortes what rights to levy new taxes and increase old ones that it had. Though this battle ebbed and flowed, it was ultimately won by the monarchy. After 1664 the Cortes did not meet again until it would be reconstructed during the Napoleonic invasions almost 150 years later.

While the English state was creating a modern, efficient tax bureaucracy, the Spanish state was again moving in the opposite direction. The monarchy was not only failing to create secure property rights for entrepreneurs and monopolizing trade, but it was also selling offices, often making them hereditary, indulging in tax farming, and even selling immunity from justice.

Under the Song dynasty, between 960 and 1279, China led the world in many technological innovations. The Chinese invented clocks, the compass, gunpowder, paper and paper money, porcelain, and blast furnaces to make cast iron before Europe did.

They independently developed spinning wheels and waterpower at more or less the same time that these emerged at the other end of Eurasia. In consequence, in 1500 standards of living were probably at least as high in China as they were in Europe. For centuries China also had a centralized state with a meritocratically recruited civil service.

Coen founded Batavia, on the island of Java, as the Dutch East India Company’s new capital in 1618. In 1621 he sailed to Banda with a fleet and proceeded to massacre almost the entire population of the islands, probably about fifteen thousand people. All their leaders were executed along with the rest, and only a few were left alive, enough to preserve the know-how necessary for mace and nutmeg production.

But the French were ahead of other countries in a major innovation: mass conscription.

These changes created the type of inclusive economic institutions that would then allow industrialization to take root in these places. By the middle of the nineteenth century, industrialization was rapidly under way in almost all the places that the French controlled, whereas places such as Austria-Hungary and Russia, which the French did not conquer, or Poland and Spain, where French hold was temporary and limited, were still largely stagnant.

Not all radical changes are doomed to failure. The Glorious Revolution was a radical change, and it led to what perhaps turned out to be the most important political revolution of the past two millennia. The French Revolution was even more radical, with its chaos and excessive violence and the ascent of Napoleon Bonaparte, but it did not re-create the ancien régime.

At independence, Botswana was one of the poorest countries in the world; it had a total of twelve kilometers of paved roads, twenty-two citizens who had graduated from university, and one hundred from secondary school. To top it all off, it was almost completely surrounded by the white regimes of South Africa, Namibia, and Rhodesia, all of which were hostile to independent African countries run by blacks. It would have been on few people’s list of countries most likely to succeed. Yet over the next forty-five years, Botswana would become one of the fastest-growing countries in the world. Today Botswana has the highest per capita income in sub-Saharan Africa, and is at the same level as successful Eastern European countries such as Estonia and Hungary, and the most successful Latin American nations, such as Costa Rica.

What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.