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 some time ago and slowly forgetting with books which we did not read at all 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 the question: “Why nations fail?” i.e. why some countries are prosperous and others are struggling. This is a very interesting question to ask, as well as very difficult one to answer. Whoever embarks on this quest should be aware of different cognitive biases and protect themselves from imperfection of our brain using well-proven scientific methods. (Remember, dear reader: just knowing about cognitive biases will not make you immune to them!)

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

The book starts by disproving some hypotheses why certain nations are ending up being more prosperous than others. Some of the theories covered are:

After disproving above mentioned theories, Daron and James in their book propose that some 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 articles talking about the book I am writing review about. 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.

Not defining hese terms properly, leaves them very rigin and flexible. Authors of the book do not skip an opportunity to put anything “good” in one class and anything bad in another. It is really easy to talk about past events in hindsight if the outcome is known. The only problem is that it is as far away from scientific rigour as comparing a boling kettle and a jet engine: they both involve something to do with heat, and that is where 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 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 due to great amount of natural resources like gold and dense local population. Colonization of the North America by British on the other hand led to establishing inclusive institutions. They argue that it happened because there were no resources to export from North America and it was not so densely populated, which in turn forced Virgina Company to come up with incentives to attract people to move there. First they gave out land to people who was ready to move there. That worked for a while, but soon that was no longer enough: people did own the land, they had absolutely no say in laws which were applicable, which undermined the value of the “ownership” and did prevented people from taking risks and establishing business 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 spending a bit more time talking about risks and economic prosperity. The book does really good job at explaining how well functioning government and economical institutions encourage business, progress and as a consequence provides higher chances of achieving 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 risktaking 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 first place. 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 revolution and examples demonstrating how private property rights and independent courts can stimulate business and innovation.