Like Diamond's famous book, Why Nations Fail sets out to answer the question of what makes countries poor or prosperous. There are many theories for that with long histories, and they mostly fall into three broad categories. Geographical determinism states that geographical conditions set countries on paths they can not easily stray from. The other main theory states that, like the character in a person, culture is destiny. Finally, many think that countries implement bad solutions because the leaders don't know better. Acemoglu and Robinson first quickly dispense with these ones. They admit that Diamond's theory works very well up until around the last 500 years. But both geographical and cultural determinism are refuted by examples like East- and West-Germany or South and North-Korea. About the ignorance theory, they show through other examples that senseless economic decisions are often the results of very rational political deliberations - buying favors and paying off supporters.
After this, they introduce a theory that is on one hand can capture the common denominator between very different countries - whose conditions are determined by countless different factors -, and on the other hand, is not generic to the point of uselessness. Their answer is that a nation's success lies mostly in its economic and political institutions. To determine what "good" institution means the authors lay down a simple theoretical framework. Institutions fall into one of two categories. "Inclusive" institutions provide opportunities and incentives. They raise no barriers to participation and allow for creative destruction and innovation. "Extractive" institutions, on the other hand, cement the power of small groups who exercise this power at the expense of the broader population. They can take many forms: absolutist monarchs, party elite, monopolies, trusts. Extractive institutions can also produce growth, but not in a sustainable way, for two reasons. One is political instability: as the power concentrates in the hand of small groups, there will always be challengers. Two, the forces of innovation and creative destruction - which are indispensable for progress - are smothered. Inclusive economic institutions, like the free market, are not born from nothing. They are the result of inclusive political institutions.
The theory is simple and generic, but it leads to wide and far-reaching political and economical lessons (for example, to the necessity of property rights, voting suffrage, central government, general education, etc). Among the many examples, the authors use to flesh out their theory I liked following two the most. The first is the comparative presentation of the evolution of banking systems in Mexico and the United States. In the nineteenth century, bank owners in both countries had the same incentives. They wanted to transform their financial clout into political power. In Mexico, they could achieve it by buying supporting the right politicians. This option was limited in the USA, as in democracies a politician can lose power after the next elections. Consequently, the USA gave birth to a large number of competing banks - efficient and client-friendly by necessity, while Mexico ended up with two giants - who neither had to be efficient, nor please their clients.
The other example of a system of inclusive institutions is the US patent system. The system was open for everyone - anyone could file his patent after paying the uniform fee -, and it incentivized people by offering the possibility of financial gains for ideas. As a consequence, it propelled technological innovation and prosperity. But as a prerequisite, it required an inclusive political institution, the central government to protect individuals' intellectual property.
The authors don't claim that good institutions predetermine the fate of a country, though. Social factors, geopolitics, or mere accidents can push history on very different trajectories. Had the mighty Spanish Armada in 1588 not been routed by the fateful storm and bad tactical decisions of its commander, the next 500 years would have probably been very, very different - for one, this post would be in Spanish. There is also a force that the authors name "institutional drift". Small, mostly randomly occurring, differences between two countries' institutions can with time accumulate and put them on very different paths. What the central claim of the book is that inclusive institutions are indispensable for long-term, sustainable growth.
After the theory is presented, the authors embark on a journey through history examining every historical era and event through the lenses of this theory. Which is of course a slight exaggeration, but it's hard to come up with anything they left out. The Roman Empire, feudal Europe, medieval and modern China, the Meiji restoration in Japan, the separation of Korea, the colonization of Africa, Australia, and the Americas, the French, the Bolshevik, and the Glorious Revolution, the Ottoman Empire, Eastern Europe, modern Africa, South America, ...
To explain why by the twentieth century the world ended up with basically two parts, the prosperous West and the poor rest, the authors point to two historical conjectures. The Black Death and the Industrial Revolution.
After the Black Death killed something between one-third and one-half of the population of Europe, labor force became much scarcer. For the common people, this led to gains in wages, then, consequently, in political rights. In Western Europe at least. In Eastern Europe, the elite solved their labor-supply problem by taking away the peasants' rights to move freely and demanding unpaid work from them. In alignment with the authors' model, the economic gap between East and West started to widen.
The next, even more important juncture in history, that set apart the West from the rest for two hundred years and counting, was the Industrial Revolution. Countries without major hurdles in the way of creative destruction and innovation benefited from the technological progress with a historically unprecedented speed. But most countries missed out, either because of the excessive and extractive centralization of power or of the complete lack of it. Absolutist monarchs (in Russia, the Austro-Hungarian Empire, or China) were afraid of change and thus blocked the way of progress - by deliberately impeding the expansion of the railway system, for example. In other countries, especially in Africa, there was no effective central government at all to guarantee individuals' property rights, so people there didn't have the incentive to invest and innovate.
By the end of the nineteenth century, political and economical rights ("inclusiveness") in the West reached the point that it created a "virtuous cycle". The institutions formed in the past hundred years gave rise to conditions under which the elites had more to lose by resisting progress than to yield to it. The first stages of the welfare state and the gradual extension of suffrage were introduced from the top (by Bismarck first and then in England) as preventive measures as the elite tried to take the wind out of the sails of revolutionaries. In other countries, especially in the colonies, extractive institutions recreated themselves in a "vicious circle". Even when the whites departed from their African colonies, the political and economic structures survived and the positions of power were immediately filled up by a new elite - who came from the natives.
The authors present countless examples to support their narrative, but of course, no book on economics or politics today can skip some explanation of China. Doesn't the Chinese Communist Party and the breakneck growth of the Chinese economy defy the theory of the book? The authors say no. China was an extractive and dirt-poor country until the late seventies. It started its miraculous growth when Deng Xiaoping rose to power and started to open the economy, and also the political structure to some degree. The country remained politically extractive, but it could economically grow, for a simple reason. China is still a poor country, with the per capita of GDP on par with Mexico. Its growth is predominantly catching up and copying solutions that were developed elsewhere. Thus it doesn't need much innovation, and its leaders definitely don't welcome creative destruction. Once it has picked all the low-hanging fruits, it will run out of steam - as the Soviet Union did.
This is a big book. Everything above really only scratches the surface. I didn't find it as readable as Diamond's - even though it's written well -, mostly because of the incredible density of information packed between the covers. Fused with general observations and constant analysis, one short history lesson follows another for 400 pages. You can open the book on any page, and you will read something interesting. But as every example is food for thought on its own, so reading it like a novel probably depletes the reader's energies in the long run - it depleted mine at least. Still, having done with it, I catch myself randomly pondering various parts of it quite often. Which for me is the usual sign of quality.
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