Mar 16, 2012

*Why Nations Fail* and George Carlin

I've just finished Why Nations Fail, and before I get into the argument, I'd like to sound a note (imagine a low D on a baritone sax) in favor of their deliciously cynical view of human leadership. It's not far from this (NSFW):

Acemoglu and Robinson (A&R) would disagree that Carlin's description applies to America, but it's a remarkably apt summary of their view of failed states. (Really!) Even for successful countries, they don't credit individual morality at all, at least on the elite level. In their scheme, every leader of every country can be treated as interchangeable greedy assholes wholly concerned with their own interests. Or as Carlin might say, elites are interested in "their own power, keeping it, and expanding it wherever possible."

Anyway, the book is about institutions. The book says there are basically two kinds in countries: extractive, and inclusive. Extractive ones are as you might expect, where the elite pins everyone down and siphons off as much of the country's wealth as possible. This is why nations fail. In order to have a modern, successful country, one needs innovation, which won't happen if people know the elite will just steal all the extra things they make. Innovation also threatens the elite because new ways break down the old. Furthermore, a successful society takes advantage of as much of the population's talent as possible, which threatens the elite because talent is broadly shared in a society.

Extractive economic institutions reinforce extractive political institutions, and vice versa. This is one of the best ideas in the book. It explains why so many repressive dictatorships have been overthrown by idealistic rebels, who then proceed to create their own dictatorship. It also explains why economic "reform" (as imposed under the Washington Consensus) and a large fraction of international aid have been ineffective. Without political and institutional reform, elites will steal the aid and rig the new "free market" to line their own pockets.

Inclusive institutions, on the other hand, are where power is broadly shared and no one can do much siphoning. They have the usual panoply of modern societies: the rule of law, democratic, accountable governance, open markets, etc., where people have an incentive to innovate and no one can siphon off the wealth of the country. But again, countries didn't develop these because their citizens and leaders are better or wiser—they got them by accident. England, they say, got the Industrial Revolution first because they happened to develop a governing body with power broadly shared (by the standards of the day) and where no group could get a conclusive upper hand and crush the opposition (and then, of course, loot the country blind).

The implication to this is that no extractive, authoritarian country (as China is now) will ever become truly wealthy. A dynamic economy requires innovation, which is impossible to get with an extractive institutions. What China is doing now is copying previous innovation, mainly moving their population out of agriculture, which allowed the Soviet Union to get strong growth for several decades before they hit a wall in the 70s.

I enjoyed this a lot, but in the end it's a little too cynical even for me. They reach too far with this premise. Ideology surely plays a much stronger role in societies, as well as the norms that develop over time. Francis Fukuyama's The Origins of Political Order, while more complicated and hedged, and a lot less fun, is ultimately more convincing. But the basic idea that the incentives created by institutions powerfully influence how elites govern is a good one, and well worth keeping in mind. Far too much current political analysis focuses on personality, and not nearly enough on the incentive structure of institutions. Maybe Fukuyama can adapt these ideas to the second part of Origins.

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