Currently Reading: Why Nations Fail

I started reading the book Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu & James A. Robinson yesterday. I’m barely into chapter 5 so far, but it was definitely a fascinating read. The purpose of the book is to examine why some countries today are stuck in a cycle of poverty, while others succeed and are economically prosperous. They discuss some of the popular theories of economic disparity like geography, culture, weather, or ignorance (of leaders in charge of the systems), but essentially debunk those hypothesis using the examples of the Korean peninsula (examining the prosperity disparity between North Korea and South Korea), and the a city that straddles the border of Mexico and the United States (I think it was called Oaxaca). They believe that the factors that could explain the phenomenon of economic prosperity across the world which could also explain the vast differences between places like Korea and Oaxaca, were the differences in  “man-made political and economic institutions that underlie economic success.”

They said there are two kinds of systems, inclusive and extractive. Inclusive societies allow regular people to participate in political and economic areas. Areas that allow widespread involvement by all of the people are more economically prosperous, because it effectively allocates resources, talent, and capital and provides them with incentive to work hard. In economies that are extractive instead of inclusive, elites in politics and economics take advantage of the general population with high taxes and exploitative labor. They're reluctant to disrupt the status quo that benefits them so much. They are reluctant to adopt new technologies because of “Creative Destruction" says that there will be a restructuring of power that occurs and there will be new economic and political winners (and the old guard will be the losers).

The inclusive societies “created incentives, rewarded innovation, and allowed everyone to participate in economic opportunities.” It was interesting that an essential commonality among these prosperous societies was the existence of private property, both tangible and intangible (intellectual property rights/ideas/patents). There was a necessity of a strong central government that could ensure law and order and enforce laws like contracts and property rights. The other role of the government was to provide services like roads, education, and healthcare.

So far it says that the economic elite and political elite, both often resist change because the new system will likely be less beneficial to them. When the state is controlled by it’s citizens rather than monopolized by a small group of elites to only benefit the rich, it prospers. One really interesting thing they wrote was that the state has to maintain a monopoly on violence, meaning violence is only sanctioned when performed by the state to preserve the stability of law and order. I’ll update more as I read more, unless this summary encapsulates their theory well enough and the rest of the book is just supporting evidence of their theory.