Why Nations Fail Review

Why Nations Fail: The origins of Power, Prosperity and Poverty
By Daron Acemoglu and James Robinson
http://whynationsfail.com/

WNF was the last meetup's book. Before the last one, we had read and discussed E.F. Schumacher's Small is Beautiful. Reading both these books back to back reflects on the contrast in ideologies existent among economists. While SiB talks about decentralized, bottom up, distributed development, WNF comes with a top-down narrative and gives its own theory of why nations fail/succeed.  SiB was mainly an ideology, its reasoning came from an adherence to rationality and common good. WNF substantiates its theory by drawing lessons from history; how countries shaped up over time and why few were prosperous while others in misery. I agree with both the bottom-up and top-down theories. I think they will meet in the middle somewhere and will be mostly same. The key point of contention comes in the means - aka the process. SiB was very careful in describing the means; the process of development should be sustainable. In contrast, WNF talks about institutions; if the institutions are sustainable, its processes will be sustainable as well.But sustainable institutions are very difficult to achieve.



WNF starts brilliantly, debunking the existential theories (and their respective economists) by contradicting all of them. Previously the failure of nations was attributed to cultural factors or geographic issues or people. Geographic and culture factors seem implausible even for a lay man, WNF proves them wrong in an more academic manner. What follows after these theories are proven false is a new theory based on data, real historic data.

At the heart of Daron and James argument are three concepts - Extractive institutions, Inclusive institutions and Creative Destruction.
Extractive Institutions - Institutions whose prosperity benefits only a few, often at the expense of others.
Inclusive Institutions - Instinstitutions which prosper by taking everyone into account, everybody benefits in its prosperity.
Creative Destruction - The process whereby an existing technology is replaced by a new, better (efficient/fast/improved) technology.

The authors argue that the construct of extractive and inclusive institutions applies to both economic and political institutions. A nations succeeds when both its political and economic institutions are inclusive and it should be open for creative destruction. So, all three are needed - (i) Inclusive political institution, (ii) inclusive economic institution and (iii) creative destruction. If any of the three is missing, the nation will eventually fail.  A fat portion of the book is dedicated in explaining the relationship between the above; it is filled with examples on how nations where one was inclusive and other exclusive failed; how nations failed to progress when they crushed creative destruction etc etc.  The book does a great job in justifying the theory; it all makes sense. USA is the poster child (which is true if we look it until the last century), England, Industrial revolution are features very positively, they do a good job in showing how the current rich became so.

Overall, i agree that institutions need to be inclusive. Yes, they are a necessity. They play a huge role,  they are very high impact bodies. But after this my disagreements begin. The first thing that strikes is how they never explain the economic disparity. Inclusive institutions benefit everybody but some get more benefit than others. The poster child country - USA, if we look at it now, its income distribution is highly skewed up. So, even with inclusive political and economic institutions, things can go wrong if the "inclusivity" is unbalanced. I am not advocating a socialistic regime as the solution, i am merely advocating that even this theory has its limits.

Bill of rights, French revolution were all very good but the thing that made Europe was the Industrial revolution, aka the process of creative destruction.  But the book never talks about the relative advantage Britain was during those times. A lot of resources were coming from African/Asian continents. Britain was inclusive in its internal institutions but it was extractive in its external ones. So, even though it prospered internally, the progress definitely came at some cost of other nations; not completely.

Another one that the book misses completely is the impact to environment/ecology even by inclusive institutions. An institution can be inclusive for current citizens but extractive if we include future generations as well. So, the temporal aspect is also missing from these books. Also not included are the social institutions. Social institutions should also be inclusive. For example, take the Indian context, the caste system is a social institution which is inclusive. Race, color, ethnicity are other dimensions based on which social institutions are structured, they are also detrimental to nations. In a way this book manages to avoid it because social institutions are often reflected in economic or political ones. In India, the upper caste were the ones who controlled political and economic institutions and hence they were extractive as well.


Overall, WNF is a brilliant attempt, it succeeds in explaining various scenarios. It also gives a very good outline on how institutions should function.  The book is correct in its inferences for the most part. But just that the theory outlined is not complete. There are parameters that lie outside the three pillars that can also influence the outcome. Nonetheless, WNF is very informative, a fascinating read and very fundamental to understand the present day world.