Book Review

Title: Why Nations Fail: The Origins of Power, Prosperity and Poverty
Author: Daron Acemoglu & James A. Robinson
Scope: 4.5 stars
Readability: 4 stars
My personal rating: 5 stars
See more on my book rating system.

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Topic of Book

The role that current and historical institutions have played in encouraging or stifling innovation and economic growth.

Key Take-aways

• In traditional societies and authoritarian regimes, powerful economic and political elites create extractive institutions to extract taxes and rents from the rest of society. This stifles innovation and economic growth.
• In democratic capitalist societies, the masses have created inclusive economic and political institutions that work for the benefit of society more widely. This encourages innovation and economic growth.

Important Quotes from Book

Whether it is North Korea, Sierra Leone, or Zimbabwe, we’ll show that poor countries are poor for the same reason that Egypt is poor. Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.

Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.

This book will show that while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has… Different patterns of institutions today are deeply rooted in the past because once society gets organized in a particular way, this tends to persist.

The contrast of South and North Korea, and of the United States and Latin America, illustrates a general principle. Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central… Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society.

We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions— extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.

 Inclusive economic institutions create inclusive markets, which not only give people freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so… Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education.

The political institutions of a society are a key determinant of the outcome of this game. They are the rules that govern incentives in politics. They determine how the government is chosen and which part of the government has the right to do what. Political institutions determine who has power in society and to what ends that power can be used. If the distribution of power is narrow and unconstrained, then the political institutions are absolutist,… In contrast, political institutions that distribute power broadly in society and subject it to constraints are pluralistic. Instead of being vested in a single individual or a narrow group, political power rests with a broad coalition or a plurality of groups.

Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions… one lesson is clear: powerful groups often stand against economic progress and against the engines of prosperity.

Related Books

• “Violence and Social Orders” by North, Wallis and Weingast
• “The Dictator’s Handbook” by Mesquita and Smith
• “Lineages of the Absolutist State” by Perry Anderson

If you would like to learn more about the role institutions played in creating economic growth, read my book From Poverty to Progress.