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

by Daron Acemoğlu

Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.

political institutions determine economic institutions and, through these, the economic incentives and the scope for economic growth.

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. If another group can overwhelm and outmaneuver this elite and take control of the state, they will be the ones enjoying this wealth and power.

The distribution and ability to exercise power will ultimately undermine the very foundations of economic prosperity, unless political institutions are transformed from extractive to inclusive.