Book Review: Why Nations Fail by Daron Acemoglu & James A. Robinson

This is going to be an interesting book review: considerable amount of time have passed since I have finished reading this book. Unwillingly I am remembering how Pierre Bayard was comparing books which we have read and slowly forgetting with books which we did not read in his How to talk about books which you have not read

What is this book about?

Authors of his book are trying to find the answer to question: “Why nations fail?” i.e. why some countries are prosperous and others are struggling. This is a very interesting question to ask, but also is a very difficult one to answer. Whoever embark on this quest should be aware of different cognitive biases and protect himself from imperfection of our brains using well-proven scientific methods. (Remember, dear reader: just knowing about cognitive biases is not making you immune to them!)

What is authors answer to the question of Why Nations Fail?

The book starts by disproving some hypotheses like

I think you might get an idea where it is going: Daron and James in their book propose that one nations are coming ahead because they have inclusive political and economical institutions while other fall behind because they have extractive institutions. What are those? There is no strict definition in the book, I have summarized it as follows:

And here we arrive at one of the biggest problems of this book.

What is not great about this book

The greatest problem with the book is that it is inventing two new terms without strictly defining them and claims that they answer very complicated question.

I tried to google the definition of Extractive institution and Inclusive institutions to no avail. The only place they are mentioned together are in articles talking about the book in question. There are bunch of resources talking either only about extractive institutions in the context of natural resources and other bunch of articles talking about inclusive institutions in the context of political life and democracy.

Without strict definitions of these newly introduced terms they are left very rigid and flexible, so authors of the book do not skip an opportunity to put anything “good” in one class and anything bad in another. Given the fact that the history is something what already happened, it is not difficult to perform such an action. The only problem is that it is as far away from scientific rigour as boiling a cup of tea and jet engine: they both involve something to do with heat, but right there similarities end.

What is good about this book

I still enjoyed this book because it highlights the good effects of democracy and free markets (obviously without mentioning and challenges or malfunctions of these conceptions). In the beginning of the book colonization of the North and South Americas by Spanish and British are compared. Daron Acemoglu & James A. Robinson state that colonization of the Inca Empire by the Spain established extractive institutions because of natural resources like gold while colonization of North America by British established inclusive institutions. They argue that it happened because there were no resources to export from North America and it was not so densely populated, that forced Virgina Company to come up with incentives to attract people to move there. First they gave out land so people will move and work there. That worked, but the problem was although people did own the land, they had absolutely no say in laws which were applicable. That also prevented people from taking risks and expanding their enterprise on new land. To encourage the colonization of North America further, they were given more autonomy and were able to pass some local laws. Well, we all know how this story ended.

I think it worth talking about risks and economic prosperity in more detail. The book does really good job at explaining how well functioning society and government encourage business, progress and as a consequence economic prosperity. Taking a risk is a big part of building a business and not being sure that you will be able to enjoy the result of this risk taking stops innovation. Here is one example from the book:

A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development — an all-too-common occurrence due to the fear of creative destruction. […] During the reign of the emperor Tiberius, a man invented unbreakable glass and wen to the emperor anticipating that he would get a great reward. He demonstrated his invention, and Tiberius asked him if he had told anyone else about it. When the man replied no, Tiberius had the man dragged away and killed, “lest gold be reduced to the value of mud.” There are two interesting things about this story. First, the man went to Tiberius in the first place for a reward, rather than setting himself up in business and making a profit by selling the glass. This shows the role of the Roman government in controlling technology. Second, Tiberius was happy to destroy the innovation because of the adverse economic effects it would have had. This is the fear of economic effects of creative destruction.

The story is an interesting one but it is not 100% clear if it actually happened

This is also a good example of another point which is covered in the book: too much centralization of power is not that great. The problem with centralized power is that it creates people who have too much to loose therefore it is very natural for them to be avoid any risk and avoid changes. And as we know changes are really important for the progress.

Summary: should you read this book?

I do not regret reading this book, although for me it did not demonstrate enough proof for proposed answer, which was opaque in itself. You should not read this book if you want to have an answer to the question in the title. But you will very likely enjoy it if you want to learn a little bit about colonization of Americas, Glorious revolutions and examples demonstrating how private property rights and independent courts can stimulate business and innovation.