WHY NATIONS FAIL By Daron Acemoglu and James A. Robinson (CHAPTER 6)

 

DRIFTING APART

HOW VENICE BECAME A MUSEUM

In the section “How Venice Became a Museum,” Acemoglu and Robinson explain how, starting around 800, Venice became “possibly the richest place in the world” by trading with growing European empires and building inclusive economic institutions. Venice’s rise shows how economic and political institutions build on each other in a positive feedback cycle. The city’s inclusive laws helped its economy grow, and this growth gave non-elite Venetians the power to make their political system more inclusive, too. The city was then able to pass even more inclusive economic laws. In particular, the commenda system was an inclusive economic institution because it gave young entrepreneurs the opportunity to build wealth and capital over time. Of course, like in virtually all other societies before the 20th century, Venice didn’t include everyone in politics or the economy, but it was still relatively inclusive because it didn’t reserve wealth and power for an exclusive group of elites.

Venice’s history shows that a nation’s luck can abruptly turn. This is an important reminder about the “contingency” of history: people decide the fate of their own societies, not destiny. After all, Acemoglu and Robinson emphasize that elites and the masses are always fighting overpower, which means that societies can always become either more inclusive or more extractive (depending on which side wins). In Venice, the elites got the upper hand. They rolled back all of the Great Council’s reforms and ended Venice’s inclusiveness.

This chapter returns to key questions about how and why institutions transform. The short answer is that people change them. It’s especially likely that people will transform institutions during periods of great historical change. What’s more, the state of institutions at these moments of change has a huge impact on their future as either inclusive or extractive societies. Venice, for instance, ended up becoming more of a museum than a powerful economic hub because its institutions had become extractive when the Industrial Revolution hit. In contrast, despite its long history as a backwater, England ended up driving the Industrial Revolution because it had the right kind of institutions at the right time.

Venice and the Roman Empire rose as they became more inclusive and fell as they became more extractive. This shows that, even though inclusive institutions tend to reinforce themselves, elites often try to dismantle (break down) them and create extractive institutions instead. Thus, the authors imply that citizens in inclusive nations should never let down their guard by assuming their institutions are safe.

The murder of Tiberius Gracchus might initially seem unusual because, as the authors have repeatedly argued, extractive institutions tend to cause political infighting not inclusive ones. Rome’s political institutions were relatively inclusive because, although they were by no means egalitarian, they were somewhat pluralistic. In other words, Roman institutions represented multiple groups, even if they didn’t represent everyone. The archaeological evidence suggests that these institutions promoted economic growth, which supports the authors’ overall thesis about institutions causing prosperity.

Despite Rome’s relatively inclusive political institutions, its economic institutions became more extractive over time, especially outside of the capital. As the authors argued in their second chapter, this kind of contradiction between inclusive and extractive institutions tends to cause unrest and transformation, until all the institutions become either inclusive or extractive. Rome went down the latter path. In fact, Gracchus’s murder was part of the elite campaign to make political institutions more extractive and prop up the extractive economic institutions that preserved their privilege.

As in Venice, Roman elites won out over the masses and established increasingly extractive institutions the Empire to benefit themselves. Again, this shows that institutions don’t always move in one direction. Rather, history is contingent. People’s decisions, historical conditions, and sheer luck can lead to unpredictable outcomes.

Acemoglu and Robinson’s hypothesis about why there was no serious, sustained economic growth anywhere in the world between the Neolithic Revolution and the Industrial Revolution. The rulers knew that innovations would replace existing technologies, causing rapid economic growth but also disrupting the existing social and economic order. Emperors and their allies rejected these innovations because the status already benefited them, while they stood to lose if someone else’s technology became essential to the functioning of society. Therefore, under strict extractive institutions, innovations could never get the traction they needed to spread, transform the economy, and start widespread growth.

The Roman Empire’s complex financial tools were really economic institutions. They gave Romans although just a small number of them the tools that they needed in order to buy and sell goods in a marketplace with others. But the Empire’s withdrawal shows how this kind of market relies on the state: it cannot exist unless the government creates institutions to protect it. Thus, when the Roman Empire retreated, England’s economy didn’t stagnate it declined.

Acemoglu and Robinson use England’s historical lack of technological and economic sophistication to emphasize the contingency of history. Its dominance wasn’t destined rather, it was the result of other earlier historical events, plus a large dose of good luck.

Ethiopia is an important case study because it followed a very similar trajectory to Western Europe, despite the fact that Ethiopia is almost completely isolated from Western Europe. Therefore, any similarities between Ethiopia and Western Europe’s trajectories must surely come from overlaps in their institutions, not historical links between the two regions. In both cases, major expansionist empires with highly centralized power structures collapsed, creating critical junctures that produced similar effects in both societies.

The authors conclude that pre-18th century institutions had an important influence on the Industrial Revolution, although they certainly didn’t ensure that it would happen. This is an important part of historical contingency: earlier events set the stage for later ones that actually determine the outcome of history. Older institutions made it possible for merchants to build inclusive institutions during the Industrial Revolution and launch economic growth in England and the US, but these people still had to actually build these institutions.