Yesterday I had the pleasure of hosting MIT economist Daron Acemoglu for an on-the-record meeting at the Council on Foreign Relations to discuss his book, Why Nations Fail, which he recently published with co-author James Robinson. It is enjoying its third week on the New York Times best-seller list (an accomplishment for any book, but especially for one by two economists that clocks in at 462 pages). Why Nations Fail tackles a question that has bedeviled experts for centuries: why are some nations rich while others are poor? Acemoglu and Robinson’s answer is straightforward – it all depends on institutions. Successful nations have good institutions that are “inclusive” and “pluralistic” and create incentives for people to work hard and invest in the future. Unsuccessful states, on the other hand, are characterized by “extractive” or “absolutist” institutions that economically and politically benefit a small group of elites at the expense of everyone else.
This sounds pretty obvious, and Acemoglu acknowledges that his work stands on the “shoulders of giants” like Adam Smith. (Smith, after all, recognized some 250 years ago that economic growth depends on “peace, easy taxes, and a tolerable administration of justice.”) But a whole host of competing theories have emerged in recent decades, suggesting that national success depends in large part on other factors such as geography, or climate, or culture, or technocratic expertise, or health (think Jared Diamond’s 1997 book Guns, Germs, and Steel). When pressed on this point in the meeting, Acemoglu acknowledged that he and Robinson do not totally dismiss other factors, but they insist that they are not causal. After all, he noted, more than half the world’s population today lives in “lucky latitudes” (latitudes that facilitated agriculture and settlement during early human history), yet with markedly different outcomes.
Acemoglu’s observations on China are particularly interesting. He grants that countries with extractive institutions can experience robust growth, but only for a while. Consequently, he says that China can continue to grow rapidly for another 15-20 years because it is “playing catch-up” and relying on imported technologies. But eventually it will have to move to a more innovative economy, one that allows for Schumpeter-style creative destruction. That will require more inclusive, pluralistic institutions that inherently threaten the entrenched position of elites. Without such a transition, Acemoglu predicts, China’s impressive growth “will evaporate.”
He also offers cautionary comments for the United States, drawing parallels with the Venetian Republic, which grew rich and powerful in the 12th-14th centuries on the back of inclusive institutions but then allowed extractive institutions to take over, saw its prosperity dissipate, and drifted toward irrelevancy. Acemoglu expresses concern that political and economic inequality in the United States is growing, pointing to the rise of super PACs as a particularly troubling leading indicator. But he remains cautiously optimistic about America’s ability to rejuvenate itself. “The U.S. was here before, during the Gilded Age,” he says, noting that a progressive agenda countered the tilt toward more extractive institutions in favor of inclusivity.
Why Nations Fail has been widely and mostly positively reviewed (by the Economist, by Martin Wolf in the Financial Times, and NYU professor William Easterly in the Wall Street Journal, among others). In his review, however, Francis Fukuyama identifies a conceptual problem with the book: the terms inclusive/extractive and absolutist/pluralistic are so broad that it is hard to “come up with a clear metric of either. It also makes it hard to falsify any of [the authors’] historical claims.” This is true, but it does not diminish how fascinating it is to read those historical accounts. At the end of the CFR meeting, Acemoglu was asked why he and Robinson didn’t call the book Why Nations Succeed. Figuring out why nations fail is hard, he said, but understanding why they succeed is even harder. Perhaps that will be the next book.