Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu & James A.

Robinson Explain the main thesis of Why Nations Fail. How do the authors defend it? Discuss two theories of economic development the authors reject and explain why they reject them. Do the authors provide adequate criticism? What are inclusive institutions? What are extractive institutions? What is the difference? Pick three nations and historical periods that the authors identify as inclusive. Explain why they identify them as such. Pick three nations and historical periods that the authors identify as extractive. Explain why they identify them as such. What is a critical juncture? How does it fit into the authors' views? What are vicious cycles and what are virtuous cycles? How do they play into the thesis of the book? Evaluate, in detail, the main thesis of Why Nations Fail.

The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty. The majority of the book examines most of the different societies over the last 600 years and some more ancient ones to determine whether this hypothesis is valid. The information is interesting and extensive, but this synopsis will only cover the basic hypothesis and corollaries that result from it.

Their main thesis is "that while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has" (page 43). That the right economic institutions are vital has long been recognized; what Acemoglu and Robinson do is emphasize the critical role of politics. They argue that an inclusive political system will allow for an inclusive economic system. Such a system provides incentives for people to acquire skills, work hard, save, invest, and, most importantly, innovate. In contrast, an extractive political system exists for the benefit of a narrow elite, and creates an extractive economic system. The masses cannot influence the political system, and have no incentives to exert themselves creating wealth that will be taken from them by the political elites. Extractive economic systems can achieve growth for a short while, but cannot achieve persistent growth. That is because they cannot generate significant technological change and because there will be infighting over the system's spoils. economies can only grow persistently if new technologies are adopted leaders in a society dominated by extractive institutions will see new technology as a potential threat Therefore only societies that adopt inclusive institutions will see persistent economic growth. Why Extractive Institutions Dont Lead to Growth (p.430) What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also

destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability. Political Monopoly? KEY IDEA: If one group has a political monopoly, then a society will not likely embrace technological change. In other words, there has to be a possibility that everyone in society can enjoy a leadership position.

nations fail because of bad political and economic institutions, which are due to history. a society that serves a narrow elite's interests will never achieve the same prosperity that a broad-based, inclusive society and economic system will. Politics matters for economic outcomes. The United States and Great Britain are cited as success stories, while many Latin American countries are apparently abject failures. This, the authors claim, is largely because of their institutional histories. Peru and Bolivia, for instance, suffered from the mining mita, a forced labour system Spanish conquistadors used to exploit the indigenous population. Meanwhile, the American colony of Jamestown experimented with and prospered under democracy and property rights. These early histories created persistence up until today.

The making of prosperity and poverty Most societies throughout history have been ruled by extractive institutions. A corollary to this is there was very little sustained progress in living standards between the establishment of farming and the Industrial Revolution because of the fear of creative destruction. Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people. Inclusive economic institutions allow and encourage participation by the great mass of people and make best use of their talents and skills by allowing the people themselves to make the choices they wish. Inclusive economic institutions pave the way for two other engines of prosperity: technology and education. Extractive economic institutions are designed to extract incomes and wealth from one subset of society in order to benefit a different subset. Politics is the process by which a society chooses the rules that will govern it. Political institutions are the rules that govern incentives; they determine how the government is chosen, and which part of the government can do what. Nations with inclusive economic institutions are not only pluralistic, but they are sufficiently politically centralized and powerful. The state must have a monopoly of the legitimate violence in society (law and order). Political institutions must be both centralized and pluralistic to be inclusive, otherwise they become extractive.

The concept of creative destruction (Joseph Schumpter) dictates that new technologies and companies will replace old ones during broad economic expansion, with the result that political and economic power may shift away from existing elites. Since the current elite in any economy do not want to be replaced, they will attempt to gain a monopoly and use the power of the state to restrain economic change. In an extractive society, these elite have control of all levers of the state and are better able to restrain growth, therefore, there is no natural path for an extractive society to become pluralistic there must be unique circumstances along with an opportunity for this to happen. Growth is possible under extractive political institutions When elites can directly allocate resources (people) to high-productivity activities growth can occur for limited periods of time, i.e. Soviet Union (1928-1970s) moved people from the rural farms to heavy industry. When political elites allow the development of somewhat inclusive economic institutions growth will occur until there is a conflict with the political structure. At that point, change must be made in the extractive political model to continue further growth and prosperity. Examples are England in the late 16 th century, South Korea, and the current China expansion. In both England and South Korea the elites found more advantage for themselves in an inclusive political structure and the change was made. How China will progress is yet to be determined, but the historical norm is for the elites to use their power to limit competition, thereby halting further growth. Small differences and critical junctures: the weight of history Small differences in different cultures and critical events often determine whether a society develops and inclusive or exclusive mindset. The default is always to have extractive political and/or economic institutions as that most benefits those currently in power. The bubonic plague killed about half the population of any area it appeared in, creating a tremendous shortage of labor and shaking the foundations of the feudal order present when it appeared this is a critical juncture in history. In England politically more inclusive institutions had been previously formed to limit the power of the monarchy and the subsequent labor revolt resulted in more inclusive economic institutions being established. In other parts of Europe the elites were able to maintain control of the economic institutions and these areas remained in general poverty. As a result, the Industrial Revolution started in England and was resisted in most of the rest of the world. England was unable to control the American colonies and the inclusive ideas, as well as the Industrial Revolution, spread there. Spain was able to control their population and their colonies and the societies remained extractive, with the result that poverty and a general lack of technology was a characteristic of Spain and their colonies in the New World. The defeat of the Spanish Armada in 1588 was another critical juncture and insured that England's inclusive political and economic institutions would survive. Interestingly, England would become a sea power and world-wide colonizer, but their method of colonization was entirely extractive and it was only in North America and Australia, where there was no gold to be removed, that inclusive institutions were able to be established.

The failure of nations today is heavily influenced by their institutional histories and their actions at the critical juncture in their development. Growth under extractive institutions While institutional differences play the critical role in explaining economic growth throughout the ages, extractive institutions can introduce some degree of law and order with a system of rules that will stimulate economic activity. This growth is based on existing technologies and is not sustainable over the long term, due to leaders fear of creative destruction. Extractive systems create internal rivalries for control and these eventually destroy the society, if it hasn't already deteriorated to the point another society conquers it. The development of farming happening several places around the world at around the same time is one development that probably happened under an extractive society. Farming or herding as opposed to hunter-gathering is based on the domestication of plant and animal species. Societies first had to become somewhat sedentary before they could evolve these skills and the decision to stop moving and settle was most likely a decision made by an elite group in the tribes and enforced through a central law and order structure. Extractive institutions are so common 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. They require political centralization. Their growth is limited by the lack of innovation and creative destruction. Instability is inherent because infighting increases over time to replace the current elite. Bars to development Both absolutist regimes and a lack of political centralization are kept in place by a fear of creative destruction. The printing press was invented in 1445, but prohibited in the Ottoman Empire until 1727; then heavily restricted until well into the 2 nd half of the 19 th century. China was another absolutist regime that actively blocked the spread of printing and literacy. Books spread ideas and increase literacy, both feared by sultans and the religious establishment. Areas without a centralized state to enforce rules and property rights cannot develop inclusive institutions, therefore industrialization cannot take place. India is a country where the English actually reversed development because an extractive culture was beneficial for English merchants. Venice introduced a partnership (commenda) where one person financed all or part of a trade mission while another managed the actual mission and both shared in the profits. This allowed new blood to manage missions to gain wealth and become the investor partner becoming part of the elite. The elite did not want to share their wealth and this practice was eventually outlawed, resulting in the downfall of the Venice merchant class. The fact that inclusive institutions can evolve to become extractive ones shows that there is no simple, cumulative process of institutional improvement. Extractive political institutions create few constrains on the exercise of power, so there are no institutions to restrain the use and abuse of power by those overthrowing previous dictators.

Infighting present in extractive institutions also paves the way for a process of descent into lawlessness, state failure, and political chaos. Reinforcing inclusive institutions A powerful process of positive feedback preserves inclusive institutions and results in respect for laws intended to be applied equally to all men. Pluralism also creates a more open system and allows independent media to flourish. Education becomes more inclusive as the need for educated workers grows. The most common restraint against extractive institutions is a broad coalition that can stand up against absolutism and replace the absolutist institutions by more inclusive, pluralistic ones. Markets, left to their own devices, can cease to be inclusive; therefore inclusive markets must create a level playing field and economic opportunities for the majority of the people. Breaking the mold History is not destiny, but inclusive change is neither automatic nor easy. A confluence of factors, in particular a critical juncture coupled with a broad coalition of those pushing for reform is often necessary to bring about inclusive institutions.

Chapter 4 begins by recounting that the Black Death killed around half of Europe's population in the latter half of the 14th century. This decimated the working class, much of which had previously been bound under feudalism. The pre-plague economy had been highly extractive, with feudal lords redistributing wealth from peasants and serfs to themselves. But after the plague, the ratio of workers to landlords significantly increased, such that workers had much greater bargaining power. Now they had the opportunity to voluntarily leave serfdom and seek better patrons and even become landowners themselves. This process proceeded apace in Western Europe and England, where wages for workers increasing and the feudal order was never fully reestablished. However, in Eastern Europe, which had a relatively more extractive economy, landlords quickly claimed all the new land. Chapter 6 begins by analyzing the history of Venice, which at one point in the 14th century was the richest city in the world. It became rich due to its gradually evolving inclusive institutions, such as political councils made up of new, young merchants who could challenge the political power of Venetian elites. As a result, the city grew in size and wealth. Of particular note was the creation of new private contract laws, banks and the joint stock company. However, due to events in the late 13th and 14th century, Venice's institutional progress was reversed, with elites regaining power and slowing the course of Venetian growth, such that between 1650 and 1800 Venice shrank while Europe boomed. The point of Chapter 6 is to emphasize that geography and culture aren't destiny and that cities like Venice, once on the rise to power, can change directions through a series of...

In Europe, the printing press changed everything. By 1800, 60% of European men and 40% of European women were literate. But the Ottoman Empire banned the use of the printing press for centuries and when they finally allowed it assigned a panel of religious experts to ensure that the books printed met with the moral and religious standards of the political elite. The consequence: by 1800, only 2% of the Ottoman population was literate. And all because extractive institutions made it possible for elites to dominate and control the populace. The Ottoman Empire was an extractive institution and held back Arab growth until its collapse after World War I. While the Ottomans and other absolutist regimes held back growth, however, some societies that lacked centralized states remained very powerful, since there was no state to produce order and create rules and property rights. In Chapter 10, the authors begin by describing the early history of the British colonization of Australia, especially New South Wales, which began as a penal colony. While British institutions were relatively inclusive, these institutions did not assign convicts rights. So they were shipped off to penal colonies where they had few rights. However, in New South Wales, there was a high demand for labor and the convicts were some of the only people around who had both the know-how and the drive to do the work. As a result, over time they were given more and more property rights and so became rich. Further, they demanded political rights so their economic rights wouldn't be removed. As a result, convicts had laid the groundwork for inclusive institutions in Australia that would eventually spread to the population as a whole and make it prosperous. In Chapter 12, the authors shift to the idea of a vicious circle, where some institutions and social changes tend to convert societies from less extractive to more extractive institutions over time. The chapter opens with the authors arguing that Sierra Leone suffered a major vicious cycle, via the breakdown of land ownership, undermined food production, as well as with other sub-Saharan African nations. Marketing boards in these countries were unkind to rural interests because they had no political power. Oddly, the British helped push extractive institutions in Sierra Leone, but they allowed inclusive institutions to flourish in Australia. This is partly due to the presence of mineral resources, which often involves a "resource curse" where powerful elites can effectively extract wealth by exploiting these resources. As a result, they have no incentive and no need to include more people in political decision-making. In Chapter 14, the authors tell the stories of nations and regions that were able to break out of their vicious cycles of extractive institutions and used some critical junctures to their advantage. Botswana has an interesting and important story, since it not only gained its own political independence but the independence was orderly and led to the formation of the Botswana Democratic Party. It kept the discovery of new minerals from leading to extraction by distributing subsoil mineral rights through Seretse Khama's government, which was considerably less bad than it might have been. It grew because it seized the critical juncture of post-colonial independence and created inclusive institutions. While Why Nations Fail has no specific main character, since it is a work of development economics, it certainly has a main character class, namely those who govern, implement and preserve extractive institutions, people we might call "extractors." Extractors are sectors of the population, almost exclusively members of social and political elites, who bend political and economic institutions to redistribute economic gains from the poor and middle-class to themselves. Thus, an extractor is someone who extracts wealth from the labor and efforts of others, especially the majority of the population which, under extractive institutions, are politically powerless. Extractors come in two main varieties - foreign and homegrown. Foreign extractors have historically been imperial powers, such as the British and Spanish Empires. The latter produced the conquistadors, the ultimate unapologetic extractors who bent native South American political institutions to their benefit. Why Nations Fail Objects/Places Inclusive Institutions Inclusive institutions are political and economic institutions that are responsive to the interests of the public as a whole. These include democratic governments and market economies.

INCLUSIVE INSTITUTIONS (p. 74): Inclusive economic institutionsare those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. (p. 75): Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations. But such rights must exist for the majority of people in society.

(p. 76): Inclusive economic institutions create inclusive markets, which not only give people freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so. Those who have good ideas will be able to start businesses, workers will tend to go to activities where their productivity is greater, and less efficient firms can be replaced by more efficient ones.

Extractive Institutions EXTRACTIVE INSTITUTIONS (p. 76): We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset. Extractive institutions are political and economic institutions that are responsive only to the interests of a social and political elite and that exploit and oppress the people as a whole. These include absolute monarchies, modern Latin American and African dictatorships and authoritarian governments like China. Critical Junctures Critical junctures describe periods in history where a country is able to choose to move in a more inclusive or extractive direction. Institutional Drift Institutional drift is the process by which institutions evolve, often guided by critical junctures. Institutional drift tends to move in an extractive or inclusive direction. Virtuous Cycles Virtuous cycles are cycles of inclusive institutions leading to increasingly inclusive institutions. Virtuous cycles are hard to produce and hard to stop. Vicious Cycles Vicious cycles are cycles of extractive institutions leading to increasingly extractive institutions.

Creative Destruction New technology replaces past technology (i.e. creating new ideas destroys past ideas). Therefore, the process of create destruction tells us that people who benefit from existing technology will see new technology as a threat. If the people who benefit from existing technology are making decisions for society, that society will not tend to adopt new technology. And therefore, that society will not see economic growth.