WHY NATIONS FAIL By Daron Acemoglu and James A. Robinson (CHAPTER 5)

"I'VE SEEN THE FUTURE AND IT WORKS":
GROWTH UNDER EXTRACTIVE INSTITUTIONS

In this chapter’s first section, “I’ve Seen the Future,” Acemoglu and Robinson note that most societies have had extractive economic and political institutions but have still managed to achieve some economic growth. However, this growth is based on existing technologies, while growth in inclusive societies is based on technological change.

Extractive political and economic institutions are designed to benefit the elite class that holds power in society. These institutions do not benefit the majority of citizens (who are better served by inclusive institutions). Specifically, extractive political institutions give the elite a monopoly on power by excluding the majority of society from government. In turn, the elite class uses these political institutions to create and sustain extractive economic institutions that enrich its members. These extractive economic institutions are harmful to the majority of society: they impoverish it, restrict its economic rights, and limit its opportunities.

Like most economists, Acemoglu and Robinson believe that free, open markets are the most efficient way to allocate limited resources because they allow everyone to pursue and fulfill their individual preferences. In contrast, while centrally planned economies can excel in certain sectors, they can’t meet the economy’s overall needs. However, unlike many economists, the authors also emphasize that building effective markets doesn’t mean keeping the government out of the economy instead, governments actually have to create free markets through economic institutions that give people the means to innovate and invest.

The authors repeat that inclusive institutions create economies based on innovation, which grow because the people who participate in them have incentives to succeed. In other words, the engine of growth is within the economy itself, which is why this growth is sustainable. On the other hand, extractive institutions create economies based on compulsion, which only grow because elites reshape them.

The Soviet Union understood the importance of innovation and took many steps to spur it along, but these attempts failed. Because Stalin’s whims controlled the economy, the authors suggest, citizens expected instability in the Soviet Union’s economic future. As a result, they couldn’t trust that their investments would be safe or that they’d be rewarded for their efforts or innovations. In fact, the authors argue that Stalin’s policies actually punished innovation and hampered creative destruction. This further supports the authors’ belief that extractive institutions are inherently hostile to innovation and stifle long-term economic growth.

The authors argue that only the free market can properly reward innovation and not government compensation schemes, which can’t even measure true innovation to begin with.

The Lele and Bushong provide a kind of natural experiment, much like North and South Korea or the two halves of Nogales. The only difference is that neither of them have inclusive institutions. Still, they share practically the same culture and geography, but neither of these factors can explain why the Bushong have a more prosperous economy.

The Kuba Kingdom shows that extractive institutions still produce more growth than no institutions at all. While extractive institutions don’t incentivize growth in general, they do give elites an incentive to increase growth as long as that growth doesn’t interfere with their power. After all, the more surplus there is, the more elites can extract and keep for themselves. Shyaam’s policies exemplify this: he restructured society so that the people he ruled would make more of what he wanted. Even though his kingdom collapsed, it left a lasting legacy among the Bushong.

In extractive societies, Acemoglu and Robinson repeatedly argue, power is the primary road to wealth and status, so leaders tend to be overly preoccupied with increasing and protecting their power. The archaeological record suggests that Maya leaders focused all their energy on war (and none of it on innovation), which is clearly consistent with the authors’ theory.

The authors link together all of the conclusions that they have reached in this chapter so far. Extractive institutions can create a very specific, limited form of economic progress. In particular, they are very effective at uniting disorganized peoples and territories, then directing them toward the goals of a single ruler or small group of elites. This explains why all of the earliest complex societies were extractive and gave rulers nearly unfettered power. But it also explains why most of them were eventually overthrown by other extractive institutions.