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November 11, 2022 - January 22, 2023
It is thus no coincidence that the English began their colonization of North America at exactly the same time. But they were already latecomers. They chose North America not because it was attractive, but because it was all that was available.
Just as the United States in the nineteenth century was more democratic politically than almost any other nation in the world at the time, it was also more democratic than others when it came to innovation. This was critical to its path to becoming the most economically innovative nation in the world.
The broad distribution of political rights in the United States, especially when compared to Mexico, guaranteed equal access to finance and loans. This in turn ensured that those with ideas and inventions could benefit from them.
Same concept of making everyone owner
Ultimately the good economic institutions of the United States resulted from the political institutions that gradually emerged after 1619.
Different patterns of institutions today are deeply rooted in the past because once society gets organized in a particular way, this tends to persist. We’ll show that this fact comes from the way that political and economic institutions interact.
Thus, according to Diamond, the differential availability of animal and plant species created differential intensities of farming, which led to different paths of technological change and prosperity across different continents.
Peru and Mexico were undoubtedly more prosperous than those parts of the Americas that went on to become the United States and Canada. North America became more prosperous precisely because it enthusiastically adopted the technologies and advances of the Industrial Revolution.
It should also be clear that Diamond’s argument, which is about continental inequality, is not well equipped to explain variation within continents—an essential part of modern world inequality.
Many also believe that Latin America will never be rich because its people are intrinsically profligate and impecunious, and because they suffer from some “Iberian” or “mañana” culture.
Stereo typing
Other aspects, such as the extent to which people trust each other or are able to cooperate, are important but they are mostly an outcome of institutions, not an independent cause.
It might be true today that Africans trust each other less than people in other parts of the world. But this is an outcome of a long history of institutions which have undermined human and property rights in Africa.
It was politics that determined the switch from communism and toward market incentives in China, not better advice or a better understanding of how the economy worked.
Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.
Explaining world inequality still needs economics to understand how different types of policies and social arrangements affect economic incentives and behavior. But it also needs politics.
Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.
Policies taken by leaders
Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education.
Today technological change requires education both for the innovator and the worker. And here we see the importance of economic institutions that create a level playing field. The United States could produce, or attract from foreign lands, the likes of Bill Gates, Steve Jobs, Sergey Brin, Larry Page, and Jeff Bezos, and the hundreds of scientists who made fundamental discoveries in information technology, nuclear power, biotech, and other fields upon which these entrepreneurs built their businesses.
The ability of economic institutions to harness the potential of inclusive markets, encourage technological innovation, invest in people, and mobilize the talents and skills of a large number of individuals is critical for economic growth. Explaining why so many economic institutions fail to meet these simple objectives is the central theme of this book.
Politics is the process by which a society chooses the rules that will govern it.
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.
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.
The logic of why the powerful would not necessarily want to set up the economic institutions that promote economic success extends easily to the choice of political institutions.
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.
As in the Soviet Union in its heyday, China is growing rapidly, but this is still growth under extractive institutions, under the control of the state, with little sign of a transition to inclusive political institutions.
Is inclusivr growth market driven?
When both political and economic institutions are extractive, the incentives will not be there for creative destruction and technological change. For a while the state may be able to create rapid economic growth by allocating resources and people by fiat, but this process is intrinsically limited.
But these categories were never as rigid as Indian caste distinctions and gradually became meaningless as predictors of a person’s occupation. Though Indian merchants did trade throughout the Indian Ocean, and a major textile industry developed, the caste system and Mughal absolutism were serious impediments to the development of inclusive economic institutions in India.
Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way. By the 1970s, economic growth had all but stopped.
previous decisions. All plans were labeled “draft” or “preliminary.”
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.
However, since productivity was calculated in terms of economic benefits measured using the existing system of prices, this was again not much of an incentive to innovate.
Innovation doesnt need economic benefit
Where was innovation to come from? We have argued that innovation comes from new people with new ideas, developing new solutions to old problems.
Rome and Venice illustrate how early steps toward inclusivity were reversed.
Given the highly absolutist and extractive Ottoman institutions, the sultan’s hostility to the printing press is easy to understand. 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.
Many, such as the Ottoman Empire, China, and other absolutist regimes, lagged behind as they blocked or at the very least did nothing to encourage the spread of industry.
The inclusive institutions established in the United States and Australia meant that the Industrial Revolution spread quickly to these lands and they began to get rich.
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.
The French Revolution in fact did more than that. It exported its institutions by invading and forcibly reforming the extractive institutions of several neighboring countries. It thus opened the way to industrialization not only in France, but in Belgium, the Netherlands, Switzerland, and parts of Germany and Italy.
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.
With time th poor coubytues will breakthrough due to new i dustrilizatuin
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.
