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

by Daron Acemoğlu

The statute in effect tried to fix wages at the levels paid before the Black Death. Particularly concerning for the English elite was “enticement,” the attempt by one lord to attract the scarce peasants of another. The solution was to make prison the punishment for leaving employment without permission of the employer:

In Korczyn, Poland, all work for the lord in 1533 was paid. But by 1600 nearly half was unpaid forced labor. In 1500, workers in Mecklenberg, in eastern Germany, owed only a few days’ unpaid labor services a year. By 1550 it was one day a week, and by 1600, three days per week. Workers’ children had to work for the lord for free for several years. In Hungary, landlords took complete control of the land in 1514, legislating one day a week of unpaid labor services for each worker. In 1550 this was raised to two days per week. By the end of the century, it was three days. Serfs subject to these rules made up 90 percent of the rural population by this time. Though in 1346 there were few differences between Western and Eastern Europe in terms of political and economic institutions, by 1600 they were worlds apart.

England was unique among nations when it made the breakthrough to sustained economic growth in the seventeenth century. Major economic changes were preceded by a political revolution that brought a distinct set of economic and political institutions, much more inclusive than those of any previous society.

The events leading up to the Glorious Revolution forged a broad and powerful coalition able to place durable constraints on the power of the monarchy and the executive, which were forced to be open to the demands of this coalition. This laid the foundations for pluralistic political institutions, which then enabled the development of economic institutions that would underpin the first Industrial Revolution.

in 1588, the differences between Western and Eastern Europe were much greater. In the West, strong centralized states such as England, France, and Spain had latent constitutional institutions (Parliament, the Estates-General, and the Cortes). There were also underlying similarities in economic institutions, such as the lack of serfdom.

Eastern Europe was a different matter. The kingdom of Poland-Lithuania, for example, was ruled by an elite class called the Szlachta, who were so powerful they had even introduced elections for kings. This was not absolute rule as in France under Louis XIV, the Sun King, but absolutism of an elite, extractive political institutions all the same.

Farther east, the Russian emperor Peter the Great was also consolidating an absolutism far more intense and extractive than even Louis XIV could manage.

But where do the small institutional differences that start this process of divergence arise in the first place? Why did Eastern Europe have different political and economic institutions than the West in the fourteenth century? Why was the balance of power between Crown and Parliament different in England than in France and Spain? As we will see in the next chapter,

The extractive political and economic institutions of the Spanish conquistadors in Latin America have endured, condemning much of the region to poverty. Argentina and Chile have, however, fared better than most other countries in the region. They had few indigenous people or mineral riches and were “neglected” while the Spanish focused on the lands occupied by the Aztec, Maya, and Incan civilizations.

Khama was an extraordinary man, uninterested in personal wealth and dedicated to building his country. Most other African countries have not been so fortunate.

In India, institutional drift worked differently and led to the development of a uniquely rigid hereditary caste system that limited the functioning of markets and the allocation of labor across occupations much more severely than the feudal order in medieval Europe.

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. By the nineteenth century, things were even less hospitable for industrialization as India became an extractive colony of the English.

This Japanese political revolution enabled more inclusive political institutions and much more inclusive economic institutions to develop, and laid the foundations for subsequent rapid Japanese growth, while China languished under absolutism.

THE POLITICAL and economic institutions of Latin America over the past five hundred years were shaped by Spanish colonialism, those of the Middle East were shaped by Ottoman colonialism.

In the Middle Ages, the Middle East itself was also a relatively advanced part of the world economically. So today it is not as poor as Africa, but the majority of its people still live in poverty.

WE HAVE SEEN that neither geographic- nor cultural- nor ignorance-based theories are helpful for explaining the lay of the land around us. They do not provide a satisfactory account for the prominent patterns of world inequality: the fact that the process of economic divergence started with the Industrial Revolution in England during the eighteenth and nineteenth centuries and then spread to Western Europe and to European settler colonies; the persistent divergence between different parts of the Americas; the poverty of Africa or the Middle East; the divergence between Eastern and Western Europe; and the transitions from stagnation to growth and the sometimes abrupt end to growth spurts. Our institutional theory does.

When the state or a narrow elite controls all these resources instead, neither the right incentives will be created nor will there be an efficient allocation of the skills and talents of people.

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.

But paying such bonuses created all sorts of disincentives to technological change. For one thing, innovation, which took resources away from current production, risked the output targets not being met and the bonuses not being paid.

The fact that bonuses were paid monthly also kept everyone focused on the present, while innovation is about making sacrifices today in order to have more tomorrow.

Central planning was just not good at replacing what the great eighteenth-century economist Adam Smith called the “invisible hand” of the market. When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from ceilings.

The system of prices used to calculate profits was almost completely unconnected to the value of new innovations or technology. Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value.

The rulers of the Soviet Union would have had to abandon extractive economic institutions, but such a move would have jeopardized their political power. Indeed, when Mikhail Gorbachev started to move away from extractive economic institutions after 1987, the power of the Communist Party crumbled, and with it, the Soviet Union.

The reason for differences between these two peoples lies in the different political institutions that emerged in the lands of the Bushong and the Lele. We noted earlier that the Lele lived in fortified villages that were not part of a unified political structure. It was different on the other side of the Kasai.

About 15,000 BC, the Ice Age came to an end as the Earth’s climate warmed up. Evidence from the Greenland ice cores suggests that average temperatures rose by as much as fifteen degrees Celsius in a short span of time. This warming seems to have coincided with rapid increases in human populations as the global warming led to expanding animal populations and much greater availability of wild plants and foods. This process was put into rapid reverse at about 14,000 BC, by a period of cooling known as the Younger Dryas, but after 9600 BC, global temperatures rose again, by seven degrees Celsius in less than a decade, and have since stayed high. Archaeologist Brian Fagan calls it the Long Summer. The warming-up of the climate was a huge critical juncture that formed the background to the Neolithic Revolution, where human societies made the transition to sedentary life, farming, and herding. This and the rest of subsequent human history have played out basking in this Long Summer.

THE INSTITUTIONAL INNOVATIONS of the Natufians, though they did most likely underpin the Neolithic Revolution, did not leave a simple legacy in world history and did not lead inexorably to the long-run prosperity of their homelands in modern Israel, Palestine, and Syria. Syria and Palestine are relatively poor parts of the modern world, and the prosperity of Israel was largely imported by the settlement of Jewish people after the Second World War and their high levels of education and easy access to advanced technologies. 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.

The Maya city-states in the area of southern Mexico, Belize, Guatemala, and Western Honduras in fact built a fairly sophisticated civilization under their own brand of extractive institutions. 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. Maya cities first began to develop around 500 BC.

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.

Throughout the Maya area the story is the same; the political institutions that had provided the context for the expansion of trade, agriculture, and population vanished. Royal courts did not function, monuments and temples were not carved, and palaces were emptied. As political and social institutions unraveled, reversing the process of state centralization, the economy contracted and the population fell.

WHAT GOES WRONG? 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.

In the Soviet Union, they took the form of the Communist Party reallocating resources from agriculture to industry and structuring some sort of incentives for managers and workers. As we have seen, such incentives were undermined by the nature of the system.

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.

China under the rule of the Communist Party is another example of society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.

England, where the decisive step toward inclusive institutions would take place in the seventeenth century, was a backwater, not only in the millennia following the Neolithic Revolution in the Middle East but also at the beginning of the Middle Ages, following the fall of the Western Roman Empire.

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. 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.

Other goods on the ships and the ship itself can sometimes be dated using radiocarbon dating, a powerful technique used by archaeologists to date the age of organic remains. Plants create energy by photosynthesis, which uses the energy from the sun to convert carbon dioxide into sugars. As they do this, plants incorporate a quantity of a naturally occurring radioisotope, carbon-14. After plants die, the carbon-14 deteriorates due to radioactive decay. When archaeologists find a shipwreck, they can date the ship’s wood by comparing the remaining carbon-14 fraction in it to that expected from atmospheric carbon-14. This gives an estimate of when the tree was cut down. Only about 20 shipwrecks have been dated to as long ago as 500 BC.

empire. As a young man, Aetius had been held hostage by barbarians, first by the Goths under Alaric and then by the Huns.

Instead of a political voice, Roman citizens now had free handouts of wheat and, subsequently, olive oil, wine, and pork, and were kept entertained by circuses and gladiatorial contests.

There could be some economic growth without innovation, relying on existing technology, but it was growth without creative destruction. And it did not last.

During the reign of the emperor Tiberius, a man invented unbreakable glass and went to the emperor anticipating that he would get a great reward. He demonstrated his invention, and Tiberius asked him if he had told anyone else about it. When the man replied no, Tiberius had the man dragged away and killed, “lest gold be reduced to the value of mud.” There are two interesting things about this story. First, the man went to Tiberius in the first place for a reward, rather than setting himself up in business and making a profit by selling the glass. This shows the role of the Roman government in controlling technology. Second, Tiberius was happy to destroy the innovation because of the adverse economic effects it would have had. This is the fear of the economic effects of creative destruction.

We have argued that innovation comes from new people with new ideas, developing new solutions to old problems.

After AD 411, England experienced an economic collapse and became a poor backwater—and not for the first time. In the previous chapter we saw how the Neolithic Revolution started in the Middle East around 9500 BC. While the inhabitants of Jericho and Abu Hureyra were living in small towns and farming, the inhabitants of England were still hunting and gathering, and would do so for at least another 5,500 years. Even then the English didn’t invent farming or herding; these were brought from the outside by migrants who had been spreading across Europe from the Middle East for thousands of years. As the inhabitants of England caught up with these major innovations, those in the Middle East were inventing cities, writing, and pottery.

But when the balance of power changed after the Black Death, and serfdom began to crumble in Western Europe, the stage was set for a much more pluralistic society without the presence of any slaves.

the height of feudalism in England, serfs faced less onerous extraction and lost about half of their output to their lords in one form or another.

In the Americas, for example, which had been cut off from Europe around 15,000 BC by the melting of the ice that linked Alaska to Russia, there were similar institutional innovations as those of the Natufians, leading to sedentary life, hierarchy, and inequality—in short, extractive institutions.

these densely settled civilizations interacted in a perverse way with European colonialism to create a “reversal of fortune,” making the places that were previously relatively wealthy in the Americas relatively poor. Today it is the United States and Canada, which were then far behind the complex civilizations in Mexico, Peru, and Bolivia, that are much richer than the rest of the Americas.

Rome and Venice illustrate how early steps toward inclusivity were reversed. The economic and institutional landscape that Rome created throughout Europe and the Middle East did not inexorably lead to the more firmly rooted inclusive institutions of later centuries.

By the sixteenth century, Europe was institutionally very distinct from sub-Saharan Africa and the Americas. Though not much richer than the most spectacular Asian civilizations in India or China,

THE REACTION TO LEE’S brilliant invention illustrates a key idea of this book. The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions.

Parliament wanted an end to absolutist political institutions; the king wanted them strengthened. These conflicts were rooted in economics. Many supported the Crown because they had been granted lucrative monopolies.