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

by Daron Acemoğlu

With workers concentrated into new factories and industrial centers, it became easier to organize and riot.

The Industrial Revolution started and made its biggest strides in England because of her uniquely inclusive economic institutions. These in turn were built on foundations laid by the inclusive political institutions brought about by the Glorious Revolution. 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. These inclusive economic institutions gave men of talent and vision such as James Watt the opportunity and incentive to develop their skills and ideas and influence the system in ways that benefited them and the nation. Naturally these men, once they had become successful, had the same urges as any other person. They wanted to block others from entering their businesses and competing against them and feared the process of creative destruction that might put them out of business, as they had previously bankrupted others. But after 1688 this became harder to accomplish. In 1775 Richard Arkwright took out an encompassing patent that he hoped would give him a monopoly on the rapidly expanding cotton spinning industry in the future. He could not get the courts to enforce it.

Books spread ideas and make the population much harder to control. Some of these ideas may be valuable new ways to increase economic growth, but others may be subversive and challenge the existing political and social status quo. Books also undermine the power of those who control oral knowledge, since they make that knowledge readily available to anyone who can master literacy. This threatened to undermine the existing status quo, where knowledge was controlled by elites.

The “dual economy” paradigm, originally proposed in 1955 by Sir Arthur Lewis, still shapes the way that most social scientists think about the economic problems of less-developed countries. According to Lewis, many less-developed or underdeveloped economies have a dual structure and are divided into a modern sector and a traditional sector. The modern sector, which corresponds to the more developed part of the economy, is associated with urban life, modern industry, and the use of advanced technologies. The traditional sector is associated with rural life, agriculture, and “backward” institutions and technologies. Backward agricultural institutions include the communal ownership of land, which implies the absence of private property rights on land. Labor was used so inefficiently in the traditional sector, according to Lewis, that it could be reallocated to the modern sector without reducing the amount the rural sector could produce. For generations of development economists building on Lewis’s insights, the “problem of development” has come to mean moving people and resources out of the traditional sector, agriculture and the countryside, and into the modern sector, industry and cities. In 1979 Lewis received the Nobel Prize for his work on economic development.

Except that the dual economy was not natural or inevitable. It had been created by European colonialism. Yes, the Homelands were poor and technologically backward, and the people were uneducated. But all this was an outcome of government policy, which had forcibly stamped out African economic growth and created the reservoir of cheap, uneducated African labor to be employed in European-controlled mines and lands.

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 EVENTS SURROUNDING the Black Act would show that the Glorious Revolution had created the rule of law, and that this notion was stronger in England and Britain, and the elites were far more constrained by it than they themselves imagined. Notably, the rule of law is not the same as rule by law. Even if the Whigs could pass a harsh, repressive law to quash obstacles from common people, they had to contend with additional constraints because of the rule of law. Their law violated the rights that the Glorious Revolution and the changes in political institutions that followed from it had already established for everybody by tearing down the “divine” rights of kings and the privileges of elites. The rule of law then implied that both elites and nonelites alike would resist its implementation.

Indeed, the rule of law is not imaginable under absolutist political institutions. It is a creation of pluralist political institutions and of the broad coalitions that support such pluralism. It’s only when many individuals and groups have a say in decisions, and the political power to have a seat at the table, that the idea that they should all be treated fairly starts making sense.

one elite by another, but a revolution against absolutism by a broad coalition made up of the gentry, merchants, and manufacturers as well as groupings of Whigs and Tories.

Once in place, the notion of the rule of law not only kept absolutism at bay but also created a type of virtuous circle: if the laws applied equally to everybody, then no individual or group, not even Cadogan or Walpole, could rise above the law, and common people accused of encroaching on private property still had the right to a fair trial.

WE SAW HOW INCLUSIVE economic and political institutions emerge. But why do they persist over time? The history of the Black Act and the limits to its implementation illustrate the virtuous circle, a powerful process of positive feedback that preserves these institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circles stems partly from the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrined in the rule of law. The ability of a subset to impose its will on others without any constraints, even if those others are ordinary citizens, as Huntridge was, threatens this very balance. If it were temporarily suspended in the case of the peasants protesting against elites encroaching on their communal lands, what was there to guarantee that it would not be suspended again? And the next time it was suspended, what would prevent the Crown and aristocracy from taking back what the merchants, businessmen, and the gentry had gained in the intervening half century? In fact, the next time it was suspended, perhaps the entire project of pluralism would come crumbling down, because a narrow set of interests would take control at the expense of the broad coalition. The political system would not risk this. But this made pluralism, and the rule of law that it implied, persistent features of Bri...

The virtuous circle arises not only from the inherent logic of pluralism and the rule of law, but also because inclusive political institutions tend to support inclusive economic institutions. This then leads to a more equal distribution of income, empowering a broad segment of society and making the political playing field even more level. This limits what one can achieve by usurping political power and reduces the incentives to re-create extractive polit...

Pluralism also creates a more open system and allows independent media to flourish, making it easier for groups that have an interest in the continuation of inclusive institutions to become awar...

The virtuous circle of inclusive institutions not only preserves what has already been achieved but also opens the door to greater inclusiveness.

British democracy was not given by the elite. It was largely taken by the masses, who were empowered by the political processes that had been ongoing in England and the rest of Britain for the last several centuries. They had become emboldened by the changes in the nature of political institutions unleashed by the Glorious Revolution. Reforms were granted because the elite thought that reform was the only way to secure the continuation of their rule, albeit in a somewhat lessened form.

There was also dynamic positive feedback between inclusive economic and political institutions making such a course of action attractive. Inclusive economic institutions led to the development of inclusive markets, inducing a more efficient allocation of resources, greater encouragement to acquire education and skills, and further innovations in technology.

The logic of the virtuous circle also meant that such repressive steps would be increasingly infeasible, again because of the positive feedback between inclusive economic and political institutions. Inclusive economic institutions lead to a more equitable distribution of resources than extractive institutions. As such, they empower the citizens at large and thus create a more level playing field, even when it comes to the fight for power. This makes it more difficult for a small elite to crush the masses rather than to give in to their demands, or at least to some of them.

In 1871 the Liberal prime minister Gladstone opened up the civil service to public examination, making it meritocratic, and thus continuing the process of political centralization and the building of state institutions that started during the Tudor period.

There is great virtue in this sort of gradual change. It is less threatening to the elite than the wholesale overthrow of the system. Each step is small, and it makes sense to give in to a small demand rather than create a major showdown.

massive monopoly—in the language of the day, a trust.

Inclusive political institutions not only check major deviations from inclusive economic institutions, but they also resist attempts to undermine their own continuation.

With pluralism, no group wants or dares to overthrow the power of another, for fear that its own power will be subsequently challenged. At the same time, the broad distribution of power makes such an overthrow difficult.

Inclusive economic institutions remove the most egregious extractive economic relations, such as slavery and serfdom, reduce the importance of monopolies, and create a dynamic economy, all of which reduces the economic benefits that one can secure, at least in the short run, by usurping political power.

Like so many other rulers in control of extractive institutions, he was afraid of challenges to his political power and was willing to sacrifice economic growth to thwart those challenges.

What liberalism means has changed over time. But in the nineteenth century in the United States and Europe, it was similar to what is today called libertarianism, and it stood for freedom of individuals, limited government, and free trade.

Separate schools shall be provided for white and colored children, and no child of either race shall be permitted to attend a school of the other race. An amendment to strike Section 256 from the constitution was narrowly defeated in the state legislature in 2004.

the German sociologist Robert Michels called it the iron law of oligarchy. The internal logic of oligarchies, and in fact of all hierarchical organizations, is that, argued Michels, they will reproduce themselves not only when the same group is in power, but even when an entirely new group takes control. What Michels did not anticipate perhaps was an echo of Karl Marx’s remark that history repeats itself—the first time as tragedy, the second time as farce.

Three factors greatly facilitated the emergence of more inclusive political institutions following the Glorious Revolution and the French Revolution. The first was new merchants and businessmen wishing to unleash the power of creative destruction from which they themselves would benefit; these new men were among the key members of the revolutionary coalitions and did not wish to see the development of yet another set of extractive institutions that would again prey on them. The second was the nature of the broad coalition that had formed in both cases. For example, the Glorious Revolution wasn’t a coup by a narrow group or a specific narrow interest, but a movement backed by merchants, industrialists, the gentry, and diverse political groupings. The same was largely true for the French Revolution. The third factor relates to the history of English and French political institutions. They created a background against which new, more inclusive regimes could develop. In both countries there was a tradition of parliaments and power sharing going back to the Magna Carta in England and to the Assembly of Notables in France. Moreover, both revolutions happened in the midst of a process that had already weakened the grasp of the absolutist, or aspiring absolutist, regimes. In neither case would these political institutions make it easy for a new set of rulers or a narrow group to take control of the state and usurp existing economic wealth and build unchecked and durable political ...

Rich nations are rich largely because they managed to develop inclusive institutions at some point during the past three hundred years. These institutions have persisted through a process of virtuous circles. Even if inclusive only in a limited sense to begin with, and sometimes fragile, they generated dynamics that would create a process of positive feedback, gradually increasing their inclusiveness.

Once pluralism was enshrined, there was a tendency for the institutions to become more inclusive over time, even if this was a rocky and uncertain process.

inclusive political institutions create constraints against the exercise and usurpation of power. They also tend to create inclusive economic institutions, which in turn make the continuation of inclusive political institutions more likely.

Under inclusive economic institutions, wealth is not concentrated in the hands of a small group that could then use its economic might to increase its political power disproportionately. Furthermore, under inclusive economic institutions there are more limited gains from holding political power, thus weaker incentives for every group and every ambitious, upstart individual to try to take control of the state. A confluence of factors at a critical juncture, including interplay between existing institutions and the opportunities and challenges brought by the critical juncture, is generally responsible for the onset of inclusive institutions, as the English case demonstrates. But once these inclusive institutions are in place, we do not need the same confluence of factors f...

vicious circles create powerful forces toward the persistence of extractive institutions. History is not destiny, and vicious circles are not unbreakable, as we will see further in chapter 14. But they are resilient. They create a powerful process of negative feedback, with extractive political institutions forging extractive economic institution...

A key factor in these episodes, which saw a major turn toward inclusive institutions, was the empowerment of a broad coalition that could stand up against absolutism and would replace the absolutist institutions by more inclusive, pluralistic ones.

Countries become failed states not because of their geography or their culture, but because of the legacy of extractive institutions, which concentrate power and wealth in the hands of those controlling the state, opening the way for unrest, strife, and civil war. Extractive institutions also directly contribute to the gradual failing of the state by neglecting investment in the most basic public services, exactly what happened in Sierra Leone.

The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy. But it is not impossible, and the iron law of oligarchy is not inevitable. Either some preexisting inclusive elements in institutions, or the presence of broad coalitions leading the fight against the existing regime, or just the contingent nature of history, can break vicious circles.

Central to our theory is the link between inclusive economic and political institutions and prosperity. 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. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.

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.

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.