Why Nations Fail: extraction, inclusion and creative destruction

Daron Acemoglu and James A. Robinson are economists, the former at MIT, the latter at Harvard. Their collaboration, Why Nations Fail, proposes to explain "The Origins of Power, Prosperity and Poverty." The hardcover features three pages of blurbs, many from Nobel Prize winners for economics. These are intended as overwhelming recommendations, but for what? Acemoglu and Robinson are too scrupulous to offer the kind of foolproof blueprint readers might hope for. While they have strong ideas about the prerequisites for power and prosperity, and the forces to blame for poverty, the authors know better than to claim that any specific policy formula can guarantee the good or eliminate the bad. They reject deterministic arguments about climate or culture and stress the importance of contingency in comparative history. But they claim to have shown that wherever prosperity has developed and persisted, there has been a "virtuous circle" of inclusive political institutions and economic structures. These are contrasted to extractive versions of the same that threaten to perpetuate a "vicious circle" of poverty and tyranny. "Inclusive" and "extractive" aren't obvious opposites, but the authors prefer "extractive" to "exclusive" because, while the bad institutions and structures often are exclusive in the plainest sense, "extractive" emphasizes the way aristocrats, oligarchs, imperialists and dictators draw resources to themselves while shutting others out of progress and its fruits. Institutions are extractive whenever a ruling clique uses its power to enrich itself at everyone else's expense. They are the opposite of "inclusive" when the rulers use their power to prevent any kind of "creative destruction." Since the authors regard creative destruction as the engine of progress, they place a priority on political over economic institutions, since tyrants are more capable of thwarting creative destruction than, say, working people.

We had better be clear about what Acemoglu and Robinson mean by creative destruction.

Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create winners as well as losers in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions. (84)

There may be a tendency today to see any steps taken by the private sector to increase "efficiency" and "productivity" as "creative destruction," but Acemoglu and Robinson don't necessarily believe that. As historians, they're mainly concerned with self-evident innovations of widespread benefit, whatever the short-term cost to the Luddites of history. They have a regrettably dismissive attitude, however, toward the self-conscious concerns of workers, if only because they take for granted that the working class has never been effective, for whatever reason, in blocking creative destruction. The authors don't really take the theoretical workers' objection to any creative destruction seriously. On a more cynical level, they don't take anyone seriously who raises the topic of consequences for workers. Acemoglu and Robinson tend to see such concerns, when expressed by rulers, as smokescreens for the rulers' own interest in stability, even at the cost of stagnation. They work from the assumption that creative destruction is always a threat to "extractive" political institutions. When Queen Elizabeth I denied a patent to the inventor of an innovative knitting machine, the authors note her protest that the labor-saving invention "would assuredly bring to [workers] ruin by depriving them of employment, thus making them beggars." But they infer from this a regal suspicion that "the mechanization of stocking production would be politically destabilizing," if only because mass unemployment would "threaten royal power." It's one thing not to sympathize with a queen, but what about those workers? Centuries later, they note a Russian tsar's resistance to industrialization and quote his warning that factory workers might "turn into a class as miserable as they are dangerous for their masters." Just as with Elizabeth, the authors read this as the tsar's fear that "the creative destruction unleashed by a modern industrial economy would undermine the political status quo." Some cynicism is justified when analyzing the words of absolute monarchs, but there's a disturbing insinuation that the only real objection to creative destruction is its latent threat to political power, which isn't really to be considered at all, while the prospect of even temporary disruption of people's ability to feed themselves is even further beneath the authors' notice. I don't mean to accuse the writers of contempt for workers or poor people, since their main argument is that "inclusive" institutions that allow creative destruction have lifted and can lift multitudes out of poverty. But theirs would have been a more comprehensive work if they had told us what they believe the working person's proper attitude toward creative destruction to be. They understand that workers in obsolete or inefficient sectors will object to it, but they never really say what workers should do about it -- how they should cope with it, since they'd no more let workers veto it than they'd grant that right to rulers.

At first glance, neither author comes across as a Republican or libertarian. In fact, Acemoglu and Robinson are cheerleaders for the centralized state, believing it the only institution that can provide the rule of law that makes societies truly inclusive. Their ideal seems to be a state that has eliminated feudalism, at least to the extent that barons, boyars, daimyo, etc. are no longer laws unto themselves or constant threats to nationwide order, but one that stops short of extractive political absolutism. Neither author is a "West is best" chauvinist. Instead, they are scathing about the damage European imperialism, essentially extractive in nature, has done to South America and Africa. If Great Britain after 1688 had the perfect combination of inclusive political and economic institutions, the writers don't see that as proof of English cultural superiority but a happy historical accident. Nor are the writers knee-jerk cheerleaders for capitalism. They endorse the Progressive Era critique of monopoly capitalism, noting that the successful too often try to preempt competition. "The presence of markets," they write, "is not by itself a guarantee of inclusive institutions....Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful. (323)"

Why Nations Fail is a genuinely non-partisan work, which may frustrate readers looking for proof that the Obama administration practices "extractive" economic policies, or that Republicans oppose "inclusive" politics. Acemoglu and Robinson are more interested in the immediate prospects for China than those of the U.S. They predict that China may continue to grow for some time, but that so long as the People's Republic's political institutions remain essentially extractive -- so long as the Communist Party can confiscate and expropriate at will -- it will eventually stagnate as the ruling class becomes more concerned with stifling the inherent political threat of economic political destruction. They acknowledge that growth is possible and has happened under extractive regimes, but claim that there's a more immediate limit to growth under those regimes than under inclusive ones. If they have an ideology of their own, the closet thing to a convenient label for it may be "neoliberal," insofar as they clearly believe in free markets, competition, creative destruction, etc., but clearly also see a place for the regulatory state and a degree of democratic participation in it.

Acemoglu and Robinson have written an informative and thought-provoking book. It actually got me thinking creatively about creative destruction in a way that's only implicit in the book itself. If creative destruction is the proof of inclusive economic institutions, can't there be a political counterpart of creative destruction in the political sphere. The authors would probably say that there is, since they implicitly invite us to draw distinctions between revolutions that actually open societies by making them more inclusive (Britain 1688, U.S. 1776, France 1789, Japan 1867) and mere coups that only put new cliques in charge of extractive institutions. Revolutions prove beneficial, it seems, when they're waged by people who aren't interested mainly (if not exclusively) in ruling, but feel that a new order is necessary for them to make a living privately. Too many anticolonial movements in the 20th century fell short of true revolution by this standard, as too many erstwhile revolutionaries succumbed to the "Iron Law of Oligarchy" and the obvious temptations of power. He cites the Reconstruction era after the Civil War as a failed revolution because Southern landowners retained real power despite losing the war and thus managed to hold blacks down for nearly another century, until federal political power facilitated grass-roots activism during the Civil Rights movement. While the writers criticize the Jacob "Reign of Terror" as an aberration during an overall-positive French Revolution, their account of Reconstruction leaves you wondering whether something like "Terror" is necessary sometimes to consolidate a meaningful, inclusive revolution. It would only be fair. If we aren't really to worry about how any individual might suffer through episodes of economic creative destruction, how much should we worry about suffering during political creative destruction if it all works out for the majority in the end? The only note of caution Acemoglu and Robinson might sound is that you can't take anything for granted. Their understanding of historical contingency makes it clear enough that the most important thing, before any economic or political institutions, is for people to do the right thing.