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Why Nations Fail

An interesting opinion piece by Thomas Friedman in the New York Times on the new book Why Nations Fail, co-authored by the M.I.T. economist Daron Acemoglu and the Harvard political scientist James A. Robinson.

The more you read it, the more you appreciate what a fool’s errand we’re on in Afghanistan and how much we need to totally revamp our whole foreign aid strategy. But most intriguing are the warning flares the authors put up about both America and China.

The book argues the key differentiator between countries is their institutions. Nations fail when instituions concentrate power in the hands of only a few.

The authors write

Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few.

“Inclusive economic institutions, are in turn supported by, and support, inclusive political institutions,” which “distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy.”

Back to Friedman in the Times

The lesson of history, the authors argue, is that you can’t get your economics right if you don’t get your politics right, which is why they don’t buy the notion that China has found the magic formula for combining political control and economic growth.

“Our analysis,” says Acemoglu, “is that China is experiencing growth under extractive institutions — under the authoritarian grip of the Communist Party, which has been able to monopolize power and mobilize resources at a scale that has allowed for a burst of economic growth starting from a very low base,” but it’s not sustainable because it doesn’t foster the degree of “creative destruction” that is so vital for innovation and higher incomes.

“Sustained economic growth requires innovation,” the authors write, “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.”

“Unless China makes the transition to an economy based on creative destruction, its growth will not last,” argues Acemoglu. But can you imagine a 20-year-old college dropout in China being allowed to start a company that challenges a whole sector of state-owned Chinese companies funded by state-owned banks? he asks.

Afghanistan was a fool’s errand

The post-9/11 view that what ailed the Arab world and Afghanistan was a lack of democracy was not wrong, said Acemoglu. What was wrong was thinking that we could easily export it. Democratic change, to be sustainable, has to emerge from grassroots movements, “but that does not mean there is nothing we can do,” he adds.

As for America

Acemoglu worries that our huge growth in economic inequality is undermining the inclusiveness of America’s institutions, too. “The real problem is that economic inequality, when it becomes this large, translates into political inequality.”

Continue Reading

Still curious? Looks like Why Nations Fail: The Origins of Power, Prosperity, and Poverty would be an interesting read.

What to read next?
Jared Diamond — How Do Great Societies Collapse?
Documentary: Guns Germs and Steel
Why Societies Collapse
Is America A New Rome

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