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

by Daron Acemoğlu

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.

In reality, the artisans were much less effective than the landowners and elites in opposing industrialization. The Luddites did not possess the political power—the ability to affect political outcomes against the wishes of other groups—of the landed aristocracy.

powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded.

The people who suffer from the extractive economic institutions cannot hope for absolutist rulers to voluntarily change political institutions and redistribute power in society. The only way to change these political institutions is to force the elite to create more pluralistic institutions.

The main barrier to political centralization is again a form of fear from change: any clan, group, or politician attempting to centralize power in the state will also be centralizing power in their own hands, and this is likely to meet the ire of other clans, groups, and individuals, who would be the political losers of this process.

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.

There are two distinct but complementary ways in which growth under extractive political institutions can emerge. First, even if economic institutions are extractive, growth is possible when elites can directly allocate resources to high-productivity activities that they themselves control.

The second type of growth under extractive political institutions arises when the institutions permit the development of somewhat, even if not completely, inclusive economic institutions. Many societies with extractive political institutions will shy away from inclusive economic institutions because of fear of creative destruction. But the degree to which the elite manage to monopolize power varies across societies. In some, the position of the elite could be sufficiently secure that they may permit some moves toward inclusive economic institutions when they are fairly certain that this will not threaten their political power. Alternatively, the historical situation could be such as to endow an extractive political regime with rather inclusive economic institutions, which they decide not to block. These provide the second way in which growth can take place under extractive political institutions.

Chinese economic growth today also has several commonalities with both the Soviet and South Korean experiences. While the early stages of Chinese growth were spearheaded by radical market reforms in the agricultural sector, reforms in the industrial sector have been more muted.

It is worth noting that political centralization is key to both ways in which growth under extractive political institutions can occur.

Even though extractive institutions can generate some growth, they will usually not generate sustained economic growth, and certainly not the type of growth that is accompanied by creative destruction.

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.

extractive political and economic institutions create a general tendency for infighting, because they lead to the concentration of wealth and power in the hands of a narrow elite.

The Black Death is a vivid example of a critical juncture, a major event or confluence of factors disrupting the existing economic or political balance in society. A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On the one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe.

Elizabeth I and her successors could not monopolize the trade with the Americas. Other European monarchs could. So while in England, Atlantic trade and colonization started creating a large group of wealthy traders with few links to the Crown, this was not the case in Spain or France. The English traders resented royal control and demanded changes in political institutions and the restriction of royal prerogatives.

Yet the institutions of Western Europe had not always been so different from those in the East. They began, as we saw earlier, to diverge in the fourteenth century when the Black Death hit in 1346. There were small differences between political and economic institutions in Western and Eastern Europe. England and Hungary were even ruled by members of the same family, the Angevins. The more important institutional differences that emerged after the Black Death then created the background upon which the more significant divergence between the East and the West would play out during the seventeenth, eighteenth, and nineteenth centuries.

The initial differences between England and Kongo meant that while new long-distance trade opportunities created a critical juncture toward pluralistic political institutions in the former, they also extinguished any hope of absolutism being defeated in the Kongo. 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;

Extractive institutions, by their very logic, must create wealth so that it can be extracted. A ruler monopolizing political power and in control of a centralized state can introduce some degree of law and order and a system of rules, and stimulate economic activity. But growth under extractive institutions differs in nature from growth brought forth by inclusive institutions. Most important, it will be not sustained growth that requires technological change, but rather growth based on existing technologies.

By the 1970s, economic growth had all but stopped. 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.

The traditional, geography-based explanation for the Neolithic Revolution—the centerpiece of Jared Diamond’s argument, which we discussed in chapter 2—is that it was driven by the fortuitous availability of many plant and animal species that could easily be domesticated. This made farming and herding attractive and induced sedentary life. After societies became sedentary and started farming, they began to develop political hierarchy, religion, and significantly more complex institutions. Though widely accepted, the evidence from the Natufians suggests that this traditional explanation puts the cart before the horse. Institutional changes occurred in societies quite a while before they made the transition to farming and were probably the cause both of the move to sedentarism, which reinforced the institutional changes, and subsequently of the Neolithic Revolution.

Certainly the transition to farming led to greater agricultural productivity and enabled a significant expansion of population.

The early growth of the Natufians did not become sustained for the same reason that Soviet growth fizzled out. Though highly significant, even revolutionary for its time, this was growth under extractive institutions. For the Natufian society it was also likely that this type of growth created deep conflicts over who would control institutions and the extraction they enabled. For every elite benefiting from extraction there is a non-elite who would love to replace him.

The Maya experience illustrates not only the possibility of growth under extractive institutions but also another fundamental limit to this type of growth: the political instability that emerges and ultimately leads to collapse of both society and state as different groups and people fight to become the extractors.

The Maya cities never unified into an empire, though some cities were subservient to others, and they often appear to have cooperated, particularly in warfare. The main connection between the region’s city-states, fifty of which we can recognize by their own glyphs, is that their people spoke around thirty-one different but closely related Mayan languages.

Around AD 100, in the city of Tikal in Guatemala, there emerged a new type of dynastic kingdom. A ruling class based on the ajaw (lord or ruler) took root with a king called the k’uhul ajaw (divine lord) and, underneath him, a hierarchy of aristocrats. The divine lord organized the society with the cooperation of these elites and also communicated with the gods. As far as we know, this new set of political institutions did not allow for any sort of popular participation, but it did bring stability.

The new political institutions led to a significant increase in economic prosperity, much of which was then extracted by the new elite based around the k’uhul ajaw. Once this system had consolidated, by around AD 300, there was little further technological change, however. Though there is some evidence of improved irrigation and water management techniques, agricultural technology was rudimentary and appears not to have changed. Building and artistic techniques became much more sophisticated over time, but in total there was little innovation.

The glyph that indicated warfare, known as “star wars” by archaeologists, shows a star showering the earth with a liquid that could be water or blood. The inscriptions also reveal patterns of alliance and competition.

The overwhelming fact about the Maya collapse is that it coincides with the overthrow of the political model based on the k’uhul ajaw.

Existing archaeological evidence does not allow us to reach a definitive conclusion about why the k’uhul ajaw and elites surrounding him were overthrown and the institutions that had created the Maya Classical Era collapsed. We know this took place in the context of intensified inter-city warfare,

Lack of creative destruction and innovation is not the only reason why there are severe limits to growth under extractive institutions. The history of the Maya city-states illustrates a more ominous and, alas, more common end, again implied by the internal logic of extractive institutions. As these institutions create significant gains for the elite, there will be strong incentives for others to fight to replace the current elite. Infighting and instability are thus inherent features of extractive institutions, and they not only create further inefficiencies but also often reverse any political centralization, sometimes even leading to the total breakdown of law and order and descent into chaos, as the Maya city-states experienced following their relative success during their Classical Era.

First, moves toward inclusive institutions, as our account of Venice shows, can be reversed. Venice became prosperous. But its political and economic institutions were overthrown, and that prosperity went into reverse.

Second, small institutional differences that play a crucial role during critical junctures are by their nature ephemeral. Because they are small, they can be reversed, then can reemerge and be reversed again.

As in Venice, Rome’s initial economic success was based on inclusive institutions—at least by the standards of their time. As in Venice, these institutions became decidedly more extractive over time. With Rome, this was a consequence of the change from the Republic (510 BC–49 BC) to the Empire (49 BC–AD 476). Even though during the Republican period Rome built an impressive empire, and long-distance trade and transport flourished, much of the Roman economy was based on extraction. The transition from republic to empire increased extraction and ultimately led to the kind of infighting, instability, and collapse that we saw with the Maya city-states.

Rome’s increasingly extractive political and economic institutions generated its demise because they caused infighting and civil war.

In Gaul before the Romans had arrived in 125 BC, it was usual to build settlements on hilltops, since these were more easily defended. With the initial arrival of Rome, settlements moved down to the plains. In the third century, this trend was reversed.

A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development—an all-too-common occurrence due to the fear of creative destruction.

Feudal society was decentralized because strong central states had atrophied, even if some rulers such as Charlemagne attempted to reconstruct them. Feudal institutions, which relied on unfree, coerced labor (the serfs), were obviously extractive, and they formed the basis for a long period of extractive and slow growth in Europe during the Middle Ages. But they also were consequential for later developments.

Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.

Parliament continued the process of political centralization that was initiated by the Tudors. It was not just that constraints increased, or that the state regulated the economy in a different way, or that the English state spent money on different things; but also the capability and capacity of the state increased in all directions.

the political developments leading up to the Glorious Revolution were shaped by several interlinked processes. Central was the political conflict between absolutism and its opponents.

Absolutism and a lack of, or weak, political centralization are two different barriers to the spread of industry. But they are also connected; both are kept in place by fear of creative destruction and because the process of political centralization often creates a tendency toward absolutism. Resistance to political centralization is motivated by reasons similar to resistance to inclusive political institutions: fear of losing political power, this time to the newly centralizing state and those who control it.

In addition to serfdom, which completely blocked the emergence of a labor market and removed the economic incentives or initiative from the mass of the rural population, Habsburg absolutism thrived on monopolies and other restrictions on trade.

After the conversion of the Aksumite king Ezana to Christianity, the Ethiopians remained Christian, and by the fourteenth century they had become the focus of the myth of King Prester John.

At the dawn of the nineteenth century, many parts of the world, especially in Africa, lacked a state that could provide even a minimal degree of law and order, which is a prerequisite for having a modern economy. There was not the equivalent of Peter the Great in Russia starting the process of political centralization and then forging Russian absolutism, let alone that of the Tudors in England centralizing the state without fully destroying—or, more appropriately, without fully being able to destroy—the Parliament and other constraints on their power. Without some degree of political centralization, even if the elites of these African polities had wished to greet industrialization with open arms, there wouldn’t have been much they could have done.

Central to this was blood wealth and blood feuding. A crime against a particular person was a crime against the whole diya-paying group, and necessitated collective compensation, blood wealth. If such blood wealth was not paid, the diya-paying group of the person who had committed the crime faced the collective retribution of the victim.

Various elites also opposed political centralization, for example, preferring oral to written interaction with citizens, because this allowed them maximum discretion. Written laws or orders could not be taken back or denied and were harder to change; they set benchmarks that governing elites might want to reverse. So neither the ruled nor the rulers of Taqali saw the introduction of writing to be to their advantage. The ruled feared how the rulers would use it, and the rulers themselves saw the absence of writing as aiding their quite precarious grip on power. It was the politics of Taqali that kept writing from being introduced.

Their initial plans of setting up a monopoly of mace and nutmeg dashed, the Dutch governor of Batavia, Jan Pieterszoon Coen, came up with an alternative plan. Coen founded Batavia, on the island of Java, as the Dutch East India Company’s new capital in 1618. In 1621 he sailed to Banda with a fleet and proceeded to massacre almost the entire population of the islands, probably about fifteen thousand people. All their leaders were executed along with the rest, and only a few were left alive, enough to preserve the know-how necessary for mace and nutmeg production. After this genocide was complete, Coen then proceeded to create the political and economic structure necessary for his plan: a plantation society. The islands were divided into sixty-eight parcels, which were given to sixty-eight Dutchmen, mostly former and current employees of the Dutch East India Company. These new plantation owners were taught how to produce the spices by the few surviving Bandanese and could buy slaves from the East India Company to populate the now-empty islands and to produce spices, which would have to be sold at fixed prices back to the company.

The slave trade initiated two adverse political processes. First, many polities initially became more absolutist, organized around a single objective: to enslave and sell others to European slavers. Second, as a consequence but, paradoxically, in opposition to the first process, warring and slaving ultimately destroyed whatever order and legitimate state authority existed in sub-Saharan Africa. Apart from warfare, slaves were also kidnapped and captured by small-scale raiding. The law also became a tool of enslavement.

So the abolition of the slave trade, rather than making slavery in Africa wither away, simply led to a redeployment of the slaves, who were now used within Africa rather than in the Americas. Moreover, many of the political institutions the slave trade had wrought in the previous two centuries were unaltered and patterns of behavior persisted.

Just as with the emergence of legitimate commerce, the advent of formal colonization after the Scramble for Africa failed to destroy slavery in Africa. Though much of European penetration into Africa was justified on the grounds that slavery had to be combated and abolished, the reality was different. In most parts of colonial Africa, slavery continued well into the twentieth century.