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

by Daron Acemoğlu

The outcome of this process was the period known as the Terror, under the command of the Jacobin faction led by Robespierre and Saint-Just, unleashed after the executions of Louis XVI and Marie Antoinette.

The forces unleashed by the revolution of 1789 ended French absolutism and would inevitably, even if slowly, lead to the emergence of inclusive institutions. France, and those parts of Europe where the revolutionary reforms had been exported, would thus take part in the industrialization process already under way in the nineteenth century.

As we have seen, alarmed by the developments in France, several European powers organized around Austria in 1792 to attack France, ostensibly to free King Louis XVI, but in reality to crush the French Revolution.

The French revolutionary armies quickly started carrying out a radical process of reform in the lands they’d conquered, abolishing the remaining vestiges of serfdom and feudal land relations and imposing equality before the law.

But Napoleon also had a genuine desire to continue and deepen the reforms of the revolution. Most important, he codified the Roman law and the ideas of equality before the law into a legal system that became known as the Code Napoleon. Napoleon saw this code as his greatest legacy and wished to impose it in every territory he controlled.

Of course, the reforms imposed by the French Revolution and Napoleon were not irreversible. In some places, such as in Hanover, Germany, the old elites were reinstated shortly after Napoleon’s fall and much of what the French achieved was lost for good. But in many other places, feudalism, the guilds, and the nobility were permanently destroyed or weakened. For instance, even after the French left, in many cases the Code Napoleon remained in effect.

All in all, French armies wrought much suffering in Europe, but they also radically changed the lay of the land. In much of Europe, gone were feudal relations; the power of the guilds; the absolutist control of monarchs and princes; the grip of the clergy on economic, social, and political power; and the foundation of ancien régime, which treated different people unequally based on their birth status. These changes created the type of inclusive economic institutions that would then allow industrialization to take root in these places. By the middle of the nineteenth century, industrialization was rapidly under way in almost all the places that the French controlled, where...

But the real intention was not simply to restore the emperor to power but to change the political and economic institutions completely.

Sakamoto Ryūma presented the shogun with an eight-point plan, urging him to resign to avoid civil war. The plan was radical, and though clause 1 stated that “political power of the country should be returned to the Imperial Court, and all decrees issued by the Court,” it included far more than just the restoration of the emperor. Clauses 2, 3, 4, and 5 stated: 2. Two legislative bodies, an Upper and Lower house, should be established, and all government measures should be decided on the basis of general opinion. 3. Men of ability among the lords, nobles and people at large should be employed as councillors, and traditional offices of the past which have lost their purpose should be abolished. 4. Foreign affairs should be carried on according to appropriate regulations worked out on the basis of general opinion. 5. Legislation and regulations of earlier times should be set aside and a new and adequate code should be selected. Shogun Yoshinobu agreed to resign, and on January 3, 1868, the Meiji Restoration was declared;

Taxation was centralized, and a modern bureaucratic state replaced the old feudal one. In 1869 the equality of all social classes before the law was introduced, and restrictions on internal migration and trade were abolished.

Individual property rights on land were introduced, and people were allowed freedom to enter and practice any trade. The state became heavily involved in the construction of infrastructure.

By 1890 Japan was the first Asian country to adopt a written constitution, and it created a constitutional monarchy with an elected parliament, the Diet, and an independent judiciary. These changes were decisive factors in enabling Japan to be the primary beneficiary from the Industrial Revolution in Asia.

China was a centralized bureaucratic empire ruled by an absolute emperor. The emperor certainly faced constraints on his power, the most important of which was the threat of rebellion. During the period 1850 to 1864, the whole of southern China was ravaged by the Taiping Rebellion, in which millions died either in conflict or through mass starvation. But opposition to the emperor was not institutionalized.

As with France, an important consequence of the British Industrial Revolution for China and Japan was military vulnerability. China was humbled by British sea power during the First Opium War, between 1839 and 1842, and the same threat became all too real for the Japanese as U.S. warships, led by Commodore Matthew Perry, pulled into Edo Bay in 1853.

The leaders of the Satsuma domain realized that economic growth—perhaps even Japanese survival—could be achieved only by institutional reforms, but the shogun opposed this because his power was tied to the existing set of institutions. To exact reforms, the shogun had to be overthrown, and he was. The situation was similar in China, but the different initial political institutions made it much harder to overthrow the emperor, something that happened only in 1911. Instead of reforming institutions, the Chinese tried to match the British militarily by importing modern weapons. The Japanese built their own armaments industry. As a consequence of these initial differences, each country responded differently to the challenges of the nineteenth century, and Japan and China diverged dramatically in the face of the critical juncture created by the Industrial Revolution. While Japanese institutions were being transformed and the economy was embarking on a path of rapid growth, in China forces pushing for institutional change were not strong enough, and extractive institutions persisted largely unabated until they would take a turn for the worse with Mao’s communist revolution in 1949.

This and the previous three chapters have told the story of how inclusive economic and political institutions emerged in England to make the Industrial Revolution possible, and why certain countries benefited from the Industrial Revolution and embarked on the path to growth, while others did not or, in fact, steadfastly refused to allow even the beginning of industrialization. Whether a country did embark on industrialization was largely a function of its institutions. The United States, which underwent a transformation similar to the English Glorious Revolution, had already developed its own brand of inclusive political and economic institutions by the end of the eighteenth century. It would thus become the first nation to exploit the new technologies coming from the British Isles, and would soon surpass Britain and become the forerunner of industrialization and technological change. Australia followed a similar path to inclusive institutions, even if somewhat later and somewhat less noticed. Its citizens, just like those in England and the United States, had to fight to obtain inclusive institutions. Once these were in place, Australia would launch its own process of economic growth. Australia and the United States could industrialize and grow rapidly because their relatively inclusive institutions would not block new technologies, innovation, or creative destruction.

Lack of a native population or resources to be extracted made colonialism in Australia and the United States a very different sort of affair, even if their citizens had to fight hard for their political rights and for inclusive institutions.

In the Moluccas as in the many other places Europeans colonized in Asia, in the Caribbean, and in South America, citizens had little chance of winning such a fight. In these places, European colonists imposed a new brand of extractive institutions, or took over whatever extractive institutions they found, in order to be able to extract valuable resources, ranging from spices and sugar to silver and gold. In many of these places, they put in motion a set of institutional changes that would make the emergence of inclusive institutions very unlikely. In some of them they explicitly stamped out whatever burgeoning industry or inclusive economic institutions existed. Most of these places would be in no situation to benefit from industrialization in the nineteenth century or even in the twentieth.

Just like the Black Death or the rise of Atlantic trade, the critical juncture created by industrialization intensified the ever-present conflict over institutions in many European nations.

Black death created a demand for peasants which enabled them to ask for more privileges. Atlantic trade created a class of rich merchatns who had money and thus power. They supported Parlament in the fights against the Absolutist monarchy or King. They won largly because of the merchants enriched by the Altlantic trade.

A major factor was the French Revolution of 1789. The end of absolutism in France opened the way for inclusive institutions, and the French ultimately embarked on industrialization and rapid economic growth. 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. Farther east the reaction was similar to that after the Black Death, when, instead of crumbling, feudalism intensified. Austria-Hungary, Russia, and the Ottoman Empire fell even further behind economically, but their absolutist monarchies managed to stay in place until the First World War.

Elsewhere in the world, absolutism was as resilient as in Eastern Europe. This was particularly true in China, where the Ming-Qing transition led to a state committed to building a stable agrarian society and hostile to international trade. But there were also institutional differences that mattered in Asia. If China reacted to the Industrial Revolution as Eastern Europe did, Japan reacted in the same way as Western Europe. Just as in France, it took a revolution to change the system, this time one led by the renegade lords of the Satsuma, Chōshū, Tosa, and Aki domains. These lords overthrew the shogun, created the Meiji Restoration, and moved Japan onto the path of institutional reforms and economic growth. We also saw that absolutism was resilient in isolated Ethiopia. Elsewhere on the continent the very same force of international trade that helped to transform English institutions in the seventeenth century locked large parts of western and central Africa into highly extractive institutions via the slave trade. This destroyed societies in some places and led to the creation of extractive slaving states in others. The institutional dynamics we have described ultimately determined which countries took advantage of the major opportunities present in the nineteenth century onward and which ones failed to do so. The roots of the world inequality we observe today can be found in this divergence. With a few exceptions, the rich countries of today are those that embarked on th...

The summary of the few previous chapters.

Whigs dominated Parliament from 1714 to 1760. Once in power, they were tempted to use their newly found position to prey on the rights of others, to have their cake and eat it, too. They were no different from the Stuart kings, but their power was far from absolute. It was constrained both by competing groups in Parliament, particularly the Tory Party which had formed to oppose the Whigs, and by the very institutions that they had fought to introduce to strengthen Parliament and to prevent the emergence of a new absolutism and the return of the Stuarts. The pluralistic nature of society that emerged from the Glorious Revolution also meant that the population at large, even those without formal representation in Parliament, had been empowered, and “blacking” was precisely a response by the common people to perceptions that the Whigs were exploiting their position.

Yet Huntridge’s victory is remarkable. The jury was made up not of Huntridge’s peers, but of major landowners and gentry, who ought to have sympathized with Walpole. But this was no longer the seventeenth century, where the Court of Star Chamber would simply follow the wishes of Stuart monarchs and act as an open tool of repression against their opponents, and where kings could remove judges whose decisions they did not like. Now the Whigs also had to abide by the rule of law, the principle that laws should not be applied selectively or arbitrarily and that nobody is above the law.

The rule of law is a very strange concept when you think about it in historical perspective. Why should laws be applied equally to all? If the king and the aristocracy have political power and the rest don’t, it’s only natural that whatever is fair game for the king and the aristocracy should be banned and punishable for the rest. 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. By the early eighteenth century, Britain was becoming sufficiently pluralistic, and the Whig elites would discover that, as enshrined in the notion of the rule of law, laws and institutions would constrain them, too.

But why did the Whigs and parliamentarians abide by such restraints? Why didn’t they use their control over Parliament and the state to force an uncompromising implementation of the Black Act and overturn the courts when the decisions didn’t go their way? The answer reveals much about the nature of the Glorious Revolution—why it didn’t just replace an old absolutism with a new version—the link between pluralism and the rule of law, and the dynamics of virtuous circles. As we saw in chapter 7, the Glorious Revolution was not the overthrow of 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. The emergence of pluralist political institutions was a consequence of this revolution. The rule of law also emerged as a by-product of this process. With many parties at the table sharing power, it was natural to have laws and constraints apply to all of them, lest one party start amassing too much power and ultimately undermine the very foundations of pluralism. Thus the notion that there were limits and restraints on rulers, the essence of the rule of law, was part of the logic of pluralism engendered by the broad coalition that made up the opposition to Stuart absolutism.

Throwing the game away would destabilize the system and open the way for absolutism by a subset of the broad coalition or even risk the return of the Stuarts. In Thompson’s words, what inhibited Parliament from creating a new absolutism was that take away law, and the royal prerogative … might flood back upon their properties and lives. Moreover, it was inherent in the very nature of the medium which they [those aristocrats, merchants etc. fighting the Crown] had selected for their own self-defense that it could not be reserved for the exclusive use only of their own class. The law, in its forms and traditions, entailed principles of equity and universality which … had to be extended to all sorts and degrees of men. 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.

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 Britis...

It is a circle that it takes a lot of contingency to get into but is almost imposible to get out of since action creates and incetive for even more of the same action. Your heart rate is up you feel it so you think you got heart attack making your heart race even more because of it which continues on and on and on.

As we saw in the context of the Peterloo Massacre in Manchester in 1819 (this page), and as we will see in more detail next, British political elites thought of using repression to avoid having to further open the political system, but they pulled back from the brink. Similarly, inclusive economic and political institutions in the United States faced serious challenges, which could have conceivably succeeded, but didn’t. And of course it was not preordained that these challenges should be defeated. It is due to not only the virtuous circle but also to the realization of the contingent path of history that British and U.S. inclusive institutions survived and became substantially stronger over time.

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

The first three decades of the nineteenth century witnessed increasing social unrest in Britain, mostly in response to increasing economic inequities and demands from the disenfranchised masses for greater political representation.

It was no surprise then that the 1831 election was mostly about a single issue: political reform.

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.

The masses did not just want the vote for its own sake but to have a seat at the table to be able to defend their interests.

Stephens had well understood that universal suffrage was the most durable way of empowering the British masses further and guaranteeing a coat, a hat, a roof, and a good dinner for the working man.

The 1832 reforms were modest, only doubling the voting franchise from 8 percent to about 16 percent of the adult male population (from about 2 to 4 percent of all the population).

Why did the British elites give in to the demands? Why did Earl Grey feel that partial—indeed, very partial—reform was the only way to preserve the system? Why did they have to put up with the lesser of the two evils, reform or revolution, rather than maintaining their power without any reform? Couldn’t they just have done what the Spanish conquistadors did in South America, what Austria-Hungarian and Russian monarchs would do in the next several decades when the demands for reform reached those lands, and what the British themselves did in the Caribbean and in India: use force to put down the demands? The answer to this question comes from the virtuous circle. The economic and political changes that had already taken place in Britain made using force to repress these demands both unattractive for the elite and increasingly infeasible.

Put differently, the same forces that made the British elite not wish to tear down the edifice of the rule of law during the Black Act also made them shun repression and rule by force, which would again risk the stability of the entire system. If undermining the law in trying to implement the Black Act would have weakened the system that merchants, businessmen, and the gentry had built in the Glorious Revolution, setting up a repressive dictatorship in 1832 would have entirely undermined it. In fact, the organizers of the protests for parliamentary reform were well aware of the importance of the rule of law and its symbolism to the British political institutions during this period.

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. All of these forces were in play in Britain by 1831. Clamping down on popular demands and undertaking a coup against inclusive political institutions would also destroy these gains, and the elites opposing greater democratization and greater inclusiveness might find themselves among those losing their fortunes from this destruction.

It was too good for everybody, even to the elite, to change it further.

In Austria-Hungary and in Russia, as we saw in chapter 8, the monarchs and the aristocracy had much to lose from industrialization and reform. In contrast, in Britain at the beginning of the nineteenth century, thanks to the development of inclusive economic institutions, there was much less at stake: there were no serfs, relatively little coercion in the labor market, and few monopolies protected by entry barriers. Clinging to power was thus much less valuable for the British elite.

It was just too good for them to destroy it now.

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. The British inclusive institutions had also already unleashed the Industrial Revolution, and Britain was highly urbanized. Using repression against an urban, concentrated, and partially organized and empowered group of people would have been much harder than repressing a peasantry or dependent serfs.

It made the masses stronger which ment that it would be even harder for elites to enslave them.

The virtuous circle thus brought the First Reform Act to Britain in 1832. But this was just the beginning. There was still a long road to travel toward real democracy, because in 1832 the elite had only offered what they thought they had to and no more. The issue of parliamentary reform was taken up by the Chartist movement, whose People’s Charter of 1838 included the clauses A vote for every man twenty-one years of age, of sound mind, and not undergoing punishment for crime. The ballot.—To protect the elector in the exercise of his vote. No property qualification for members of Parliament—thus enabling the constituencies to return the man of their choice, be he rich or poor. Payment of members, thus enabling an honest tradesman, working man, or other person, to serve a constituency, when taken from his business to attend to the interests of the Country. Equal Constituencies, securing the same amount of representation for the same number of electors, instead of allowing small constituencies to swamp the votes of large ones. Annual Parliaments, thus presenting the most effectual check to bribery and intimidation, since though a constituency might be bought once in seven years (even with the ballot), no purse could buy a constituency (under a system of universal suffrage) in each ensuing twelve-month; and since members, when elected for a year only, would not be able to defy and betray their constituents as now.

In July 1866, major pro-reform riots in Hyde Park brought reform right to the top of the political agenda once more.

This pressure bore dividends in the form of the Second Reform Act of 1867, in which the total electorate was doubled and working-class voters became the majority in all urban constituencies. Shortly afterward the secret ballot was introduced and moves were made to eliminate corrupt electoral practices such as “treating” (essentially buying votes in exchange for which the voter received a treat, usually money, food, or alcohol). The electorate was doubled again by the Third Reform Act of 1884, when 60 percent of adult males were enfranchised. Following the First World War, the Representation of the People Act of 1918 gave the vote to all adult males over the age of twenty-one, and to women over the age of thirty who were taxpayers or married to taxpayers. Ultimately, all women also received the vote on the same terms as men in 1928.

The exact events that led to voting rights for all.

During 1906–1914, the Liberal Party, under the leadership of H. H. Asquith and David Lloyd George, began to use the state to provide far more public services, including health and unemployment insurance, government-financed pensions, minimum wages, and a commitment to redistributive taxation. As a result of these fiscal changes, taxes as a proportion of national product more than doubled in the last three decades of the nineteenth century, and then doubled again in the first three decades of the twentieth. The tax system also became more “progressive,” so that wealthier people bore a heavier burden.

The begging of basic social acts.

Meanwhile, the education system, which was previously either primarily for the elite, run by religious denominations, or required poor people to pay fees, was made more accessible to the masses; the Education Act of 1870 committed the government to the systematic provision of universal education for the first time. Education became free of charge in 1891.

As a result of these changes, the proportion of ten-year-olds enrolled in school, which stood at a disappointing 40 percent in 1870, increased to 100 percent in 1900.

In fact, the British example, an illustration of the virtuous circle of inclusive institutions, provides an example of a “gradual virtuous circle.” The political changes were unmistakably toward more inclusive political institutions and were the result of demands from empowered masses. But they were also gradual. Every decade another step, sometimes smaller, sometimes larger, was taken toward democracy. There was conflict over each step, and the outcome of each was contingent. But the virtuous circle created forces that reduced the stakes involved in clinging to power. It also spurred the rule of law, making it harder to use force against those who were demanding what these elites had themselves demanded from Stuart monarchs. It became less likely that this conflict would turn into an all-out revolution and more likely that it would be resolved in favor of greater inclusiveness. 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.

Gradual change also prevented ventures into uncharted territories. A violent overthrow of the system means that something entirely new has to be built in place of what has been removed. This was the case with the French Revolution, when the first experiment with democracy led to the Terror and then back to a monarchy twice before finally leading to the French Third Republic in 1870. It was the case in the Russian Revolution, where the desires of many for a more equal system than that of the Russian Empire led to a one-party dictatorship that was much more violent, bloody, and vicious than what it had replaced. Gradual reform was difficult in these societies precisely because they lacked pluralism and were highly extractive. It was the pluralism emerging from the Glorious Revolution, and the rule of law that it introduced, that made gradual change feasible, and desirable, in Britain.

“It is with infinite caution that any man should venture upon pulling down an edifice, which has answered in any tolerable degree for ages the common purposes of society, or on building it up again without having models and patterns of approved utility before his eyes.” Burke was wrong on the big picture. The French Revolution had replaced a rotten edifice and opened the way for inclusive institutions not only in France, but throughout much of Western Europe. But Burke’s caution was not entirely off the mark. The gradual process of British political reform, which had started in 1688 and would pick up pace three decades after Burke’s death, would be more effective because its gradual nature made it more powerful, harder to resist, and ultimately more durable.

Inclusive institutions in the United States had their roots in the struggles in Virginia, Maryland, and the Carolinas during the colonial period (this page–this page). These institutions were reinforced by the Constitution of the United States, with its system of constraints and its separation of powers. But the Constitution did not mark the end of the development of inclusive institutions. Just as in Britain, these were strengthened by a process of positive feedback, based on the virtuous circle.