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

by Daron Acemoğlu

Stalin understood that in the Soviet economy, people had few incentives to work hard. A natural response would have been to introduce such incentives, and sometimes he did—for example, by directing food supplies to areas where productivity had fallen—to reward improvements. Moreover, as early as 1931 he gave up on the idea of creating “socialist men and women” who would work without monetary incentives. In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. It is instructive to understand how this worked. Typically a firm under central planning had to meet an output target set under the plan, though such plans were often renegotiated and changed. From the 1930s, workers were paid bonuses if the output levels were attained. These could be quite high—for instance, as much as 37 percent of the wage for management or senior engineers. 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. For another, output targets were usually based on previous production levels. This created a huge incentive never to expand output, since this only meant having to produce more in the future, since future targets would be “ratcheted up.” Underachievement was always the best way to meet targets and get the bonus...

The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions.

“We do not desire at all that the great masses shall become well off and independent … How could we otherwise rule over them?”

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.

In 1936 De Beers was also given the right to create the Diamond Protection Force, a private army that would become larger than that of the colonial government in Sierra Leone.

What Michels did not anticipate perhaps was an echo of Karl Marx’s remark that history repeats itself—the first time as tragedy, the second time as farce.

It is not that Argentinians are just naïve and think that Juan Perón or the more recent Perónist politicians such as Menem or the Kirchners are selfless and looking out for their interests, or that Venezuelans see their salvation in Chávez. Instead, many Argentinians and Venezuelans recognize that all other politicians and parties have for so long failed to give them voice, to provide them with the most basic public services, such as roads and education, and to protect them from exploitation by local elites. So many Venezuelans today support the policies that Chávez is adopting even if these come with corruption and waste in the same way that many Argentinians supported Perón’s policies in the 1940s and 1970s. Second, it is again the underlying extractive institutions that make politics so attractive to, and so biased in favor of, strongmen such as Perón and Chávez, rather than an effective party system producing socially desirable alternatives.

Conflict over income and power, and indirectly over institutions, is a constant in all societies.

Many politicians around the world were spending more than they were raising in tax revenue and were then forcing their central banks to make up the difference by printing money. The resulting inflation was creating instability and uncertainty.