Why Nations Fail: The Origins of Power, Prosperity, and Poverty

by Daron Acemoğlu

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.

The reason that the United States had a banking industry that was radically better for the economic prosperity of the country had nothing to do with differences in the motivation of those who owned the banks. Indeed, the profit motive, which underpinned the monopolistic nature of the banking industry in Mexico, was present in the United States, too. But this profit motive was channeled differently because of the radically different U.S. institutions. The bankers faced different economic institutions, institutions that subjected them to much greater competition. And this was largely because the politicians who wrote the rules for the bankers faced very different incentives themselves, forged by different political institutions.

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.

If you went back fifty years, the countries in the top and bottom thirty wouldn’t be greatly different. Singapore and South Korea would not be among the richest countries, and there would be several different countries in the bottom thirty, but the overall picture that emerged would be remarkably consistent with what we see today. Go back one hundred years, or a hundred and fifty, and you’d find nearly the same countries in the same groups.

Make a list of the nations in the Americas from richest to poorest. You will find that at the top are the United States and Canada, followed by Chile, Argentina, Brazil, Mexico, and Uruguay, and maybe also Venezuela, depending on the price of oil. After that you have Colombia, the Dominican Republic, Ecuador, and Peru. At the bottom there is another distinct, much poorer group, comprising Bolivia, Guatemala, and Paraguay. Go back fifty years, and you’ll find an identical ranking. One hundred years: same thing. One hundred and fifty years: again the same. So it is not just that the United States and Canada are richer than Latin America; there is also a definite and persistent divide between the rich and poor nations within Latin America.

Interesting fact about nations

The real reason that the Kongolese did not adopt superior technology was because they lacked any incentives to do so. They faced a high risk of all their output being expropriated and taxed by the all-powerful king, whether or not he had converted to Catholicism. In fact, it wasn’t only their property that was insecure. Their continued existence was held by a thread. Many of them were captured and sold as slaves—hardly the environment to encourage investment to increase long-term productivity. Neither did the king have incentives to adopt the plow on a large scale or to make increasing agricultural productivity his main priority; exporting slaves was so much more profitable.

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.

All in all, they were the clear economic losers from industrialization. Urbanization and the emergence of a socially conscious middle and working class also challenged the political monopoly of landed aristocracies. So with the spread of the Industrial Revolution the aristocracies weren’t just the economic losers; they also risked becoming political losers, losing their hold on political power. With their economic and political power under threat, these elites often formed a formidable opposition against industrialization.

Slavery was central to the economy, used by the elite to supply their own plantations and by Europeans on the coast. Taxes were arbitrary; one tax was even collected every time the king’s beret fell off. To become more prosperous, the Kongolese people would have had to save and invest—for example, by buying plows. But it would not have been worthwhile, since any extra output that they produced using better technology would have been subject to expropriation by the king and his elite. Instead of investing to increase their productivity and selling their products in markets, 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 most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elites.

Even technological innovation doesn’t necessarily lead to increased agricultural production. In fact, it is known that a major technological innovation, the introduction of the steel axe among the group of Australian Aboriginal peoples known as Yir Yoront, led not to more intense production but to more sleeping, because it allowed subsistence requirements to be met more easily, with little incentive to work for more.

For every elite benefiting from extraction there is a non-elite who would love to replace him.

Finally, in 1589, his “stocking frame” knitting machine was ready. He traveled to London with excitement to seek an interview with Elizabeth I to show her how useful the machine would be and to ask her for a patent that would stop other people from copying the design. He rented a building to set the machine up and, with the help of his local member of Parliament Richard Parkyns, met Henry Carey, Lord Hundson, a member of the Queen’s Privy Council. Carey arranged for Queen Elizabeth to come see the machine, but her reaction was devastating. She refused to grant Lee a patent, instead observing, “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.”

The stocking frame was an innovation that promised huge productivity increases, but it also promised creative destruction.

The Peasants’ Revolt of 1381 (this page) was pivotal, after which the English elite were rocked by a long sequence of popular insurrections. Political power was being redistributed not simply from the king to the lords, but also from the elite to the people. These changes, together with the increasing constraints on the king’s power, made the emergence of a broad coalition opposed to absolutism possible and thus laid the foundations for pluralistic political institutions.

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.

As a consequence of this lack of political centralization and the implied absence of even the most basic security of property rights, Somali society never generated incentives to invest in productivity-enhancing technologies. As the process of industrialization was under way in other parts of the world in the nineteenth and early twentieth centuries, Somalis were feuding and fending for their lives, and their economic backwardness became more ingrained.

An extraordinary piece of evidence supporting the economic dynamism and prosperity of African farmers in this period is revealed in a letter sent in 1869 by a Methodist missionary, W. J. Davis. Writing to England, he recorded with pleasure that he had collected forty-six pounds in cash “for the Lancashire Cotton Relief Fund.” In this period the prosperous African farmers were donating money for relief of the poor English textile workers!

The electorate was doubled again by the Third Reform Act of 1884, when 60 percent of adult males were enfranchised. Following the First World War, the Representation of the People Act of 1918 gave the vote to all adult males over the age of twenty-one, and to women over the age of thirty who were taxpayers or married to taxpayers. Ultimately, all women also received the vote on the same terms as men in 1928.

The apogee of Progressive reforms came with the election of Woodrow Wilson in 1912. Wilson noted in his 1913 book, The New Freedom, “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.”

Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful. Inclusive economic institutions require not just markets, but inclusive markets that create a level playing field and economic opportunities for the majority of the people. Widespread monopoly, backed by the political power of the elite, contradicts this. But the reaction to the monopoly trusts also illustrates that when political institutions are inclusive, they create a countervailing force against movements away from inclusive markets.