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April 28 - July 20, 2025
Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.
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Politicians tried to set up state banking monopolies, which they could give to their friends and partners in exchange for part of the monopoly profits. The banks also quickly got into the business of lending money to the politicians who regulated them,
In rich countries, individuals are healthier, live longer, and are much better educated. They also have access to a range of amenities and options in life, from vacations to career paths, that people in poor countries can only dream of. People in rich countries also drive on roads without potholes, and enjoy toilets, electricity, and running water in their houses. They also typically have governments that do not arbitrarily arrest or harass them; on the contrary, the governments provide services, including education, health care, roads, and law and order.
The average citizen of the United States is seven times as prosperous as the average Mexican and more than ten times as the resident of Peru or Central America. She is about twenty times as prosperous as the average inhabitant of sub-Saharan Africa, and almost forty times as those living in the poorest African countries such as Mali, Ethiopia, and Sierra Leone.
Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.
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.
Different patterns of institutions today are deeply rooted in the past because once society gets organized in a particular way, this tends to persist.
He argued that people in tropical climates tended to be lazy and to lack inquisitiveness. As a consequence, they didn’t work hard and were not innovative, and this was the reason why they were poor. Montesquieu also speculated that lazy people tended to be ruled by despots,
“economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality. As the economist Abba Lerner noted in the 1970s, “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”
Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.
Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society.
We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.
Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education.
The price these nations pay for low education of their population and lack of inclusive markets is high. They fail to mobilize their nascent talent. They have many potential Bill Gateses and perhaps one or two Albert Einsteins who are now working as poor, uneducated farmers, being coerced to do what they don’t want to do or being drafted into the army, because they never had the opportunity to realize their vocation in life.
Politics is the process by which a society chooses the rules that will govern it.
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.
We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions.
“I’ve seen the future, and it works.”
“only bureaucrats can think that planning work ends with the creation of the plan. The creation of the plan is just the beginning. The real direction of the plan develops only after the putting together of the plan.”
Syria and Palestine are relatively poor parts of the modern world, and the prosperity of Israel was largely imported by the settlement of Jewish people after the Second World War and their high levels of education and easy access to advanced technologies.
As early as 1485 the Ottoman sultan Bayezid II issued an edict that Muslims were expressly forbidden from printing in Arabic. This rule was further reinforced by Sultan Selim I in 1515. It was not until 1727 that the first printing press was allowed in the Ottoman lands.
In 1800 probably only 2 to 3 percent of the citizens of the Ottoman Empire were literate, compared with 60 percent of adult males and 40 percent of adult females in England.
The Dutch East India Company was the second European joint stock company, following the English East India Company, major landmarks in the development of the modern corporation, which would subsequently play a major role in European industrial growth. It was also the second company that had its own army and the power to wage war and colonize foreign lands.
It was the development of the sugar plantation colonies of the Caribbean beginning in the early seventeenth century that led to a dramatic escalation of the international slave trade and to an unprecedented increase in the importance of slavery within Africa itself. In the sixteenth century, probably about 300,000 slaves were traded in the Atlantic.
The eighteenth century saw another dramatic increase, with about 6,000,000 slaves being shipped across the Atlantic and maybe 700,000 across the Sahara. Adding the figures up over periods and parts of Africa, well over 10,000,000 Africans were shipped out of the continent as slaves.
In an address in 1911, Sonjica noted how when he first expressed to his father his desire to buy land, his father had responded: “Buy land? How can you want to buy land? Don’t you know that all land is God’s, and he gave it to the chiefs only?”
EIGHTEENTH-CENTURY ENGLAND—or more appropriately, Great Britain after the 1707 union of England, Wales, and Scotland—had a simple solution for dealing with criminals: out of sight, out of mind, or at least out of trouble. They transported many to penal colonies in the empire.
With a few exceptions, the rich countries of today are those that embarked on the process of industrialization and technological change starting in the nineteenth century, and the poor ones are those that did not.
The rule of law is a very strange concept when you think about it in historical perspective. Why should laws be applied equally to all? If the king and the aristocracy have political power and the rest don’t, it’s only natural that whatever is fair game for the king and the aristocracy should be banned and punishable for the rest.
It is highly significant that the English state stopped censoring the media after 1688. The media played a similarly important role in empowering the population at large and in the continuation of the virtuous circle of institutional development in the United States,
The question of universal suffrage … is a knife and fork question, a bread and cheese question … by universal suffrage I mean to say that every working man in the land has a right to a good coat on his back, a good hat on his head, a good roof for the shelter of his household, a good dinner upon his table.
Shortly afterward the secret ballot was introduced and moves were made to eliminate corrupt electoral practices such as “treating” (essentially buying votes in exchange for which the voter received a treat, usually money, food, or alcohol).
“It should be as much the aim of those who seek for social betterment to rid the business world of crimes of cunning as to rid the entire body politic of crimes of violence.”
“If monopoly persists, monopoly will always sit at the helm of government. I do not expect to see monopoly restrain itself. If there are men in this country big enough to own the government of the United States, they are going to own it.”
Inclusive political institutions allow a free media to flourish, and a free media, in turn, makes it more likely that threats against inclusive economic and political institutions will be widely known and resisted.
The vicious circle is based on extractive political institutions creating extractive economic institutions, which in turn support the extractive political institutions, because economic wealth and power buy political power.
It is not only that many of the postindependence leaders of Africa moved into the same residences, made use of the same patronage networks, and employed the same ways of manipulating markets and extracting resources as had the colonial regimes and the emperors they replaced; but they also made things worse.
The essence of the iron law of oligarchy, this particular facet of the vicious circle, is that new leaders overthrowing old ones with promises of radical change bring nothing but more of the same.
To illustrate how difficult it was to understand Argentina, the Nobel Prize–winning economist Simon Kuznets once famously remarked that there were four sorts of countries: developed, underdeveloped, Japan, and Argentina.
The economic reforms of the 1990s promoted by international financial institutions and economists were aimed at freeing up markets and reducing the role of the state in the economy. A key pillar of such reforms everywhere was the privatization of state-owned assets.
Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth.
At a conference in Guangzhou in the south of China in 1961, Deng argued, “No matter whether the cat is black or white, if it catches mice, it’s a good cat.”
THERE ARE HUGE DIFFERENCES in living standards around the world. Even the poorest citizens of the United States have incomes and access to health care, education, public services, and economic and social opportunities that are far superior to those available to the vast mass of people living in sub-Saharan Africa, South Asia, and Central America.
Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity.
An important aspect of this is that property rights are not entirely secure in China. Every now and then, just like Dai, some entrepreneurs are expropriated. Labor mobility is tightly regulated, and the most basic of property rights, the right to sell one’s own labor in the way one wishes, is still highly imperfect.
Chinese economic institutions are certainly more inclusive than those in the Soviet Union, but China’s political institutions are still extractive. The Communist Party is all-powerful in China and controls the entire state bureaucracy, the armed forces, the media, and large parts of the economy. Chinese people have few political freedoms and very little participation in the political process.
In a somewhat postmodern version of modernization theory, New York Times columnist Thomas Friedman went so far as to suggest that once a country got enough McDonald’s restaurants, democracy and institutions were bound to follow. All this paints an optimistic picture.
