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

by Daron Acemoğlu

The collapse of the Spanish state with the Napoleonic invasion created a constitutional crisis throughout colonial Latin America. There was much dispute about whether to recognize the authority of the Junta Central, and in response, many Latin Americans began to form their own juntas. It was only a matter of time before they began to sense the possibility of becoming truly independent from Spain.

Faced finally with the imposition of this document in Mexico, the elites there decided that it was better to go it alone and declare independence.

Recognizing the power vacuum, he quickly took advantage of his military backing to have himself declared emperor, a position that the great leader of South American independence Simón Bolivar described as “by the grace of God and of bayonets.” Iturbide was not constrained by the same political institutions that constrained presidents of the United States; he quickly made himself a dictator, and by October 1822 he had dismissed the constitutionally sanctioned congress and replaced it with a junta of his choosing. Though Iturbide did not last long, this pattern of events was to be repeated time and time again in nineteenth-century Mexico.

The compromise was that in apportioning seats to the House of Representatives, a slave would count as three-fifths of a free person. The conflicts between the North and South of the United States were repressed during the constitutional process as the three-fifths rule and other compromises were worked out. New fixes were added over time—for example, the Missouri Compromise, an arrangement where one proslavery and one antislavery state were always added to the union together, to keep the balance in the Senate between those for and those against slavery. These fudges kept the political institutions of the United States working peacefully until the Civil War finally resolved the conflicts in favor of the North.

the motivation behind the Mexican declaration of independence was to protect the set of economic institutions developed during the colonial period, which had made Mexico, in the words of the great German explorer and geographer of Latin America Alexander von Humbolt, “the country of inequality.” These institutions, by basing the society on the exploitation of indigenous people and the creation of monopolies, blocked the economic incentives and initiatives of the great mass of the population. As the United States began to experience the Industrial Revolution in the first half of the nineteenth century, Mexico got poorer.

The engine of technological breakthroughs throughout the economy was innovation, spearheaded by new entrepreneurs and businessmen eager to apply their new ideas. This initial flowering soon spread across the North Atlantic to the United States. People saw the great economic opportunities available in adopting the new technologies developed in England. They were also inspired to develop their own inventions.

Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.

The massive scarcity of labor created by the plague shook the foundations of the feudal order. It encouraged peasants to demand that things change. At Eynsham Abbey, for example, the peasants demanded that many of the fines and unpaid labor be reduced. They got what they wanted, and their new contract began with the assertion “At the time of the mortality or pestilence, which occurred in 1349, scarcely two tenants remained in the manor, and they expressed their intention of leaving unless Brother Nicholas of Upton, then abbot and lord of the manor, made a new agreement with them.” He did. What happened at Eynsham happened everywhere. Peasants started to free themselves from compulsory labor services and many obligations to their lords.

The attempt by the English state to stop the changes of institutions and wages that came in the wake of the Black Death didn’t work. In 1381 the Peasants’ Revolt broke out, and the rebels, under the leadership of Wat Tyler, even captured most of London. Though they were ultimately defeated, and Tyler was executed, there were no more attempts to enforce the Statute of Laborers. Feudal labor services dwindled away, an inclusive labor market began to emerge in England, and wages rose.

KING SHYAAM’S ACHIEVEMENT illustrates how some limited degree of economic success can be achieved through extractive institutions. Creating such growth requires a centralized state. To centralize the state, a political revolution is often necessary. Once Shyaam created this state, he could use its power to reorganize the economy and boost agricultural productivity, which he could then tax.

What Shyaam accomplished was an institutional innovation not tied in any deterministic way to geography, culture, or ignorance. The Lele could have had such a revolution and similarly transformed their institutions, but they didn’t. Perhaps this is for reasons that we do not understand, because of our limited knowledge of their society today. Most likely it is because of the contingent nature of history. The same contingency was probably at work when some of the societies in the Middle East twelve thousand years ago embarked upon an even more radical set of institutional innovations leading to settled societies and then to the domestication of plants and animals, as we discuss next.

It was not that the Natufians lived in an area uniquely endowed with wild species that made them special. It was that they were sedentary before they started domesticating plants or animals.

While it might be collectively desirable to become sedentary, this doesn’t mean that it will necessarily happen. A mobile group of hunter-gatherers would have to agree to do this, or someone would have to force them. Some archaeologists have suggested that increasing population density and declining living standards were key factors in the emergence of sedentary life, forcing mobile people to stay in one place. Yet the density of Natufian sites is no greater than that of previous groups, so there does not appear to be evidence of increasing population density. Skeletal and dental evidence does not suggest deteriorating health, either.

More important is that while sedentary life had pluses, it also had minuses. Conflict resolution was probably much harder for sedentary groups, since disagreements could be resolved less easily by people or groups merely moving away. Once people had built permanent buildings and had more assets than they could carry, moving away was a much less attractive option. So villages needed more effective ways of resolving conflict and more elaborate notions of property. Decisions would have to be made about who had access to which piece of land close to the village, or who got to pick fruit from which stand of trees and fish in which part of the stream. Rules had to be developed, and the institutions that made and enforced rules had to be elaborated.

In order for sedentary life to emerge, it therefore seems plausible that hunter-gatherers would have had to be forced to settle down, and this would have to have been preceded by an institutional innovation concentrating power in the hands of a group that would become the political elite, enforce property rights, maintain order, and also benefit from their status by extracting resources from the rest of society.

Natufians developed a complex society characterized by hierarchy, order, and inequality—beginnings of what we would recognize as extractive institutions—a long time before they became farmers.

The preponderance of evidence from Natufian sites suggests that these were probably already societies with elaborate institutions determining inheritance of elite status. They engaged in trade with distant places and had nascent forms of religion and political hierarchies.

The emergence of political elites most likely created the transition first to sedentary life and then to farming. As the Natufian sites show, sedentary life did not necessarily mean farming and herding. People could settle down but still make their living by hunting and gathering. After all, the Long Summer made wild crops more bountiful, and hunting and gathering was likely to have been more attractive. Most people may have been quite satisfied with a subsistence life based on hunting and gathering that did not require a lot of effort. 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.

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.

societies reorganized to take advantage of the greater opportunities created by the glut of wild plants and animals, and it was no doubt the political elites who were the main beneficiaries of these new opportunities and of the political centralization process. Other places that had only slightly different institutions did not permit their political elites to take similar advantage of this juncture and lagged behind the process of political centralization and the creation of settled, agricultural, and more complex societies.

For every elite benefiting from extraction there is a non-elite who would love to replace him. Sometimes infighting simply replaces one elite with another. Sometimes it destroys the whole extractive society, unleashing a process of state and societal collapse, as the spectacular civilization that Maya city-states built more than one thousand years ago experienced.

The basis for the economic development of the Maya Classical Era was the same as that for the Bushong and the Natufians: the creation of extractive institutions with some degree of state centralization.

Though the extractive institutions that the Mayas created produced sufficient wealth for the cities to flourish and the elite to become wealthy and generate great art and monumental buildings, the system was not stable. The extractive institutions upon which this narrow elite ruled created extensive inequality, and thus the potential for infighting between those who could benefit from the wealth extracted from the people. This conflict ultimately led to the undoing of the Maya civilization.

Conflicts were their doom.

Extractive institutions are so common in history because they have a powerful logic: they can generate some limited prosperity while at the same time distributing it into the hands of a small elite. For this growth to happen, there must be political centralization. Once this is in place, the state—or the elite controlling the state—typically has incentives to invest and generate wealth, encourage others to invest so that the state can extract resources from them, and even mimic some of the processes that would normally be set in motion by inclusive economic institutions and markets.

The potential for creating extractive growth gives an impetus to political centralization

The growth generated by extractive institutions is very different in nature from growth created under inclusive institutions, however. Most important, it is not sustainable. By their very nature, extractive institutions do not foster creative destruction and generate at best only a limited amount of technological progress. The growth they engender thus lasts for only so long.

ultimately the incentives faced in every sector, from agriculture to industry, could not stimulate technological progress.

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.

One of the key bases for the economic expansion of Venice was a series of contractual innovations making economic institutions much more inclusive.

commenda

The first important innovation was the creation of a Great Council, which was to be the ultimate source of political power in Venice from this point on.

The second innovation was the creation of yet another council, chosen by the Great Council by lot, to nominate the doge.

The third innovation was that a new doge had to swear an oath of office that circumscribed ducal power.

But there was a tension in all this. Economic growth supported by the inclusive Venetian institutions was accompanied by creative destruction. Each new wave of enterprising young men who became rich via the commenda or other similar economic institutions tended to reduce the profits and economic success of established elites. And they did not just reduce their profits; they also challenged their political power. Thus there was always a temptation, if they could get away with it, for the existing elites sitting in the Great Council to close down the system to these new people.

La Serrata

The Great Council was now effectively sealed to outsiders, and the initial incumbents had become a hereditary aristocracy.

The switch toward extractive political institutions was now being followed by a move toward extractive economic institutions. Most important, they banned the use of commenda contracts, one of the great institutional innovations that had made Venice rich. This shouldn’t be a surprise: the commenda benefited new merchants, and now the established elite was trying to exclude them.

We saw in chapter 4 how the institutions of Western Europe diverged from those in Eastern Europe and then how those of England diverged from those in the rest of Western Europe. This was a consequence of small institutional differences, mostly resulting from institutional drift interacting with critical junctures. It might then be tempting to think that these institutional differences are the tip of a deep historical iceberg where under the waterline we find English and European institutions inexorably drifting away from those elsewhere, based on historical events dating back millennia. The rest, as they say, is history. Except that it isn’t, for two reasons. 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.

The fact that inclusive institutions can go into reverse shows that there is no simple cumulative process of institutional improvement.

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.

In understanding the path to England’s Industrial Revolution and the countries that followed it, Rome’s legacy is nonetheless important for several reasons. First, Rome, like Venice, underwent major early institutional innovations. 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.

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.

Second and more important, we will see that Western Europe’s subsequent institutional development, though it was not a direct inheritance of Rome, was a consequence of critical junctures that were common across the region in the wake of the collapse of the Western Roman Empire.

Roman decline led to feudalism, which, as a by-product, caused slavery to wither away, brought into existence cities that were outside the sphere of influence of monarchs and aristocrats, and in the process created a set of institutions where the political powers of rulers were weakened. It was upon this feudal foundation that the Black Death would create havoc and further strengthen independent cities and peasants at the expense of monarchs, aristocrats, and large landowners.

The republic cleverly designed political institutions with many inclusive elements. It was governed by magistrates elected for a year. That the office of magistrate was elected, annually, and held by multiple people at the same time reduced the ability of any one person to consolidate or exploit his power. The republic’s institutions contained a system of checks and balances that distributed power fairly widely.

But Roman growth was unsustainable, occurring under institutions that were partially inclusive and partially extractive.

As its expansion throughout the Mediterranean continued, Rome experienced an influx of great riches. But this bounty was captured mostly by a few wealthy families of senatorial rank, and inequality between rich and poor increased. Senators owed their wealth not only to their control of the lucrative provinces but also to their very large estates throughout Italy.

By the late second century BC, the situation had reached a dangerous boiling point, both because the gap between rich and poor had widened to unprecedented levels and because there were hordes of discontented citizens in Rome ready to rebel in response to these injustices and turn against the Roman aristocracy.

Many would meet a similar fate. Tiberius Gracchus’s brother Gaius, for example, was also murdered by landowners, after he took the mantle from his brother.

The extractive politics handles things through killing their enemies which led to even bigger instabilty and inequality in power. The Roman empire is the proof that infighting over political power of elites leads to fall of extractive political system and the system it governes.