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August 18 - November 17, 2021
In this book we’ll argue that the Egyptians in Tahrir Square, not most academics and commentators, have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people.
Egypt has had revolutions in the past that did not change things, because those who mounted the revolutions simply took over the reins from those they’d deposed and re-created a similar system.
They chose North America not because it was attractive, but because it was all that was available.
It was Smith who was the first to realize that the model of colonization that had worked so well for Cortés and Pizarro simply would not work in North America.
The situation was so desperate that they resorted to cannibalism.
The document that the delegates sat down to write in Philadelphia in May 1787 was the outcome of a long process initiated by the formation of the General Assembly in Jamestown in 1619.
the Missouri Compromise, an arrangement where one proslavery and one antislavery state were always added to the union together, to keep the balance in the Senate between those for and those against slavery.
The patent system, which protects property rights in ideas, was systematized in the Statute of Monopolies legislated by the English Parliament in 1623, partially as an attempt to stop the king from arbitrarily granting “letters patent” to whomever he wanted—effectively granting exclusive rights to undertake certain activities or businesses.
Moreover, the intense competition among banks and financial institutions in the United States meant that this capital was available at fairly low interest rates.
Each society functions with a set of economic and political rules created and enforced by the state and the citizens collectively.
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.
There is no necessity for a society to develop or adopt the institutions that are best for economic growth or the welfare of its citizens, because other institutions may be even better for those who control politics and political institutions.
many once believed that the Chinese culture and Confucian values were inimical to economic growth, though now the importance of the Chinese work ethic as the engine of growth in China, Hong Kong, and Singapore is trumpeted.
poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.
Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.
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, such as the elite of the Communist Party of North Korea or the sugar planters of colonial Barbados, will be much better off by setting up institutions that are extractive.
Max Weber, who we met in the previous chapter, provided the most famous and widely accepted definition of the state, identifying it with the “monopoly of legitimate violence” in society.
Economic rights without political rights would not have been trusted by the colonists, who had seen the persistent efforts of the Virginia Company to coerce them.
combinations of extractive and inclusive institutions are generally unstable.
Economic institutions that create incentives for economic progress may simultaneously redistribute income and power in such a way that a predatory dictator and others with political power may become worse off.
Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction.
Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.
John Kay, English inventor of the “flying shuttle” in 1733, one of the first significant improvements in the mechanization of weaving, had his house burned down by Luddites in 1753.
Would they be interested in changing political institutions to make them more pluralistic? In general not, since this would only dilute their political power, making it more difficult, maybe impossible, for them to structure economic institutions to further their own interests.
Political centralization is likely only when one group of people is sufficiently more powerful than others to build a state. In Somalia, power is evenly balanced, and no one clan can impose its will on any other. Therefore, the lack of political centralization persists.
the Kongolese moved their villages away from the market; they were trying to be as far away from the roads as possible, in order to reduce the incidence of plunder and to escape the reach of slave traders.
The poverty of the Kongo was therefore the result of extractive economic institutions that blocked all the engines of prosperity or even made them work in reverse.
This lack of political centralization, almost to the point of total collapse of the state, is a feature that Congo shares with much of sub-Saharan Africa.
The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty. But this implies neither that extractive institutions can never generate growth nor that all extractive institutions are created equal.
the arrangements that support economic growth under extractive political institutions are, by their nature, fragile—they can collapse or can be easily destroyed by the infighting that the extractive institutions themselves generate.
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.
It is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution. The great inventors such as James Watt (perfecter of the steam engine), Richard Trevithick (the builder of the first steam locomotive), Richard Arkwright (the inventor of the spinning frame), and Isambard Kingdom Brunel (the creator of several revolutionary steamships) were able to take up the economic opportunities generated by their ideas, were confident that their property rights would be respected, and had access to markets where their innovations could be profitably
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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.
Argentina and Chile have, however, fared better than most other countries in the region. They had few indigenous people or mineral riches and were “neglected” while the Spanish focused on the lands occupied by the Aztec, Maya, and Incan civilizations.
In much of Africa the substantial profits to be had from slaving led not only to its intensification and even more insecure property rights for the people but also to intense warfare and the destruction of many existing institutions;
As we will see (pages 404–414), in the nineteenth century, King Khama, the grandfather of Botswana’s first prime minister at independence, Seretse Khama, initiated institutional changes to modernize the political and economic institutions of his tribe. Quite uniquely, these changes were not destroyed in the colonial period, partly as a consequence of Khama’s and other chiefs’ clever challenges to colonial authority.
In India, institutional drift worked differently and led to the development of a uniquely rigid hereditary caste system that limited the functioning of markets and the allocation of labor across occupations much more severely than the feudal order in medieval Europe.
Modern Anglo-Saxon surnames such as Baker, Cooper, and Smith are direct descendants of hereditary occupational categories.
IF THE POLITICAL and economic institutions of Latin America over the past five hundred years were shaped by Spanish colonialism, those of the Middle East were shaped by Ottoman colonialism.
Rates of taxation in the Middle Eastern territories were very high, varying between one-half or two-thirds of what farmers produced.
How Europeans themselves stamped out the possibility of economic growth in many parts of the world that they conquered.
Right up until the early 1980s, many Westerners were still seeing the future in the Soviet Union, and they kept on believing that it was working. In a sense it was, or at least it did for a time.
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.
Allowing people to make their own decisions via markets is the best way for a society to efficiently use its resources. When the state or a narrow elite controls all these resources instead, neither the right incentives will be created nor will there be an efficient allocation of the skills and talents of people.
Only one copy of a plan labeled “final”—that for light industry in 1939—has ever come to light.
As for Gosplan, its main role was to provide Stalin with information so he could better monitor his friends and enemies. It actually tried to avoid making decisions. If you made a decision that turned out badly, you might get shot. Better to avoid all responsibility.
When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from ceilings.
Focusing on the different rules and bonus schemes tends to mask the inherent problems of the system. As long as political authority and power rested with the Communist Party, it was impossible to fundamentally change the basic incentives that people faced, bonuses or no bonuses.
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.
