Why Nations Fail, a review
Why Nations Fail: The Origins of Power, Prosperity and Poverty, by Daron Acemoglu and James A. Robinson, is a fascinating exploration of why economies do or don’t succeed. Jumping through and across time, they examine the intricacies of different economic institutions, delving into the organization of policies, regulations, and incentives. By disproving many traditional theories regarding why societies fail, Acemoglu and Robinson provide a compelling perspective that places politics and institutional framework at the forefront of economic trajectory.
Coinciding with my completion of the book, Acemoglu and Robinson, alongside colleague Simon Johnson, were awarded the Nobel Prize in Economic Sciences. Their award reflects an advancement of our understanding of prosperity and poverty through the consideration of institutional and political influence. In a nutshell, they explain that, although controlling governments can exploit resources and create wealth in the short term, democratic systems foster sustainable success in the long term.
From European colonization to the Soviet Union, Acemoglu and Robinson explore several factors that differentiate economic outcomes. In their opinion, these factors emerge differently based on the type of institution in question; institutions can be either “extractive” or “inclusive.”
Extractive systems are characterized by concentrated, unbalanced power and the exploitation of resources. Their systems both naturally and purposefully disincentivize citizens through limited property rights, lack of voting ability, and unjust taxation systems. The income gap is often extreme, with only a narrow few benefiting from the nation’s production income. With an elite, small group wielding virtually all financial and political control, it becomes difficult— if not impossible— for the extractive cycle to end.
In contrast, inclusive institutions create incentives for citizens, encouraging voluntary participation in both political and economic activities. Because economic benefits are more widely distributed, power is more balanced, and it becomes much less likely for political control to become absolute. Thus, in the same way extractive institutions perpetuate inequality, inclusive institutions promote democracy.
Despite their differences, both systems can create economic growth; however, extractive growth is short-term and limited by nature. The main hindrance to growth is the regulation of technological innovation and a fear of what Acemoglu and Robinson call “creative destruction.”
Creative destruction is the process in which existing frameworks, in light of innovation, are replaced or destroyed. Whether through the loss of jobs or disruption of industries, creative destruction can be thought of as a temporary sacrifice on the path toward long-term growth. The fear of creative destruction that limits extractive institutions stems from the narrow elite in control. By allowing innovation to occur, the existing systems supporting the elite’s wealth and political power become threatened.
Acemoglu and Robinson use the Soviet Union as a prime example. Through their extremely extractive institutions, innovation was all but banned. All private property, businesses, and production were controlled by the state. The government controlled all economic decisions, including which industries to invest in. Although temporarily productive, the Soviet Union’s institutional framework resulted in an extremely stifled economy. Without any freedom for individuals to innovate and companies to compete, growth was extremely limited, resulting in shortages, poor living standards, corruption, and ultimately, collapse.
Today, creative destruction remains a central discussion across industries. With the emergence of innovations including AI, blockchain technology, and renewable energy solutions, governments are faced with the task of developing regulations that ensure safety yet uphold creative freedom. A 2023 study conducted by McKinsey estimates that, by 2060, over half of today’s jobs could be completely automated by AI— illustrating the temporary sacrificial consequences of creative destruction. As AI and similar new technology continue to emerge, citizens must keep an eye on their institutions. Will they act extractively or inclusively, encouraging or stifling innovation? More importantly, society must be willing to accept destruction, adapt, and evolve in response to creative change, rather than letting fear control progress.
Works Cited
Acemoglu, D., Johnson, S., & Robinson, J. (2021, October 11). Nobel for economics awarded to Daron Acemoglu, Simon Johnson, James Robinson. The Wall Street Journal. https://www.wsj.com/economy/global/nobel-for-economics-awarded-to-daron-acemoglu-simon-johnson-james-robinson-8ae2c3c2?mod=djem10point. Accessed 14 October, 2024.
Mind & Metrics. (n.d.). Dangers of AI: How AI is affecting the job market and more. https://www.mindandmetrics.com/blog/dangers-of-ai-how-ai-is-affecting-the-job-market-and-more. Accessed 14 October, 2024.