Book reviews

Daron ACEMOGLU & James A. ROBINSON: Why Nations Fail. The Origins of Power, Prosperity, and Poverty, London: Profile Books 2013

Would you invest in a country where the president wins the lottery? Would you trust that they respect and protect your property rights, or would you try to convert your invention into cash in another country? When dictator Mugabe of Zimbabwe won the special edition of the lottery, this was an undeniable sign of how extractive the system was. It shifted resources from the population to a narrow elite.

Acemoglu and Robinson’s book is full of breathtaking examples, stretching from ancient times over the middle-ages to modernity. And all of them exemplify that the problem of underdevelopment has one root: extractive institutions.

The argument the authors develop is quite convincing: It is not culture or geography that decides the future of a country, but institutions. Embedded in historical “new institutionalism“, the authors define institutions very broadly. Institutions are social constructions that are more than just organizations but also “ways of doing things”.

Just an example of how institutionalists would handle “marriage”: This institution has formal and informal elements. For instance, marriage means that you have certain legal rights and duties vis-à-vis the other, but it also constrains your behavior beyond legal aspects.

Once a decision is made and institutional patterns evolve, further actions are path-dependent, and it is often critical junctures at which a new path can be entered. Historically, the plague was such a critical juncture (affecting the institution of feudalism), or the discovery of the Americas (establishing highly extractive institutions in what is today Latin America). Such critical junctures may affect only one tiny piece of something. Still, it may have extraordinary effects, both in a positive or negative direction, initiating virtuous or vicious circles.

The authors distinguish between economic and political institutions. Both economic and political institutions can take on two forms: extractive and inclusive. Through extractive institutions, the ruling elite extracts wealth from society for its benefit, not the benefit of the population as a whole. Extractive institutions may create growth as long as resources are deviated from less productive into more productive branches. An example is the Soviet Union in the 1950s and 60s, where forced industrialization replaced unproductive agriculture, resulting in high growth rates and catching up with more developed countries. The problem is that this type of growth is not sustainable. Inclusive institutions are needed to sustain welfare production in the long run.

Why is that? The problem is that extractive institutions – steered by the elites in power – prevent creative destruction from happening. Creative destruction is a landmark invention or development that changes the rules of the game. The central example in the book: Industrialisation in England. It brought about a new social stratification and, as a result, the shift of power from the crown to parliament, making state administration more inclusive, as every layer of society could participate in the tremendous amount of wealth produced at that time.

Let’s travel from London to Vienna: With industrialization came railways and trains pulled by locomotives. In Austria-Hungary, the Emperor banned this invention. He was afraid that the “people” might be able to travel to Vienna faster to protest, eroding his power, which was based on extractive institutions. Finally, when the pressure became too strong, he allowed railways, but no locomotives. The carriages had to be pulled by horses! Everybody can imagine what that does mean for Austrian industrialization. The results became evident in World War I and the military underperformance of the k.k-Empire.

How do we have to imagine the internal dynamics of institutions? Acemoglu and Robinson borrowed from Robert Michels (1911). They identify the “iron law of oligarchy” as the cause for inclusive institutions degenerating into extractive institutions. The problem is systemic. According to Michels, big organizations become “conservative” on the way. Conservative in a sense that they protect what is already there and work against changes that might negatively affect the persons who profit from the status quo. This is no problem if a broad part of society profits, but it is a problem when a narrow elite in oligarchic positions extract the wealth. People with cumulative power (oligarchs) may once have been the drivers behind creative destruction, but now they have become guardians of a standstill. Their control of access to the decision-making system excludes the participation of the majority on a level playing field.

From Acemoglu & Robinson’s hypothesis, we can draw two conclusions:

  1. The rise of China is a typical case, nothing special. The country’s power may peak these days, but extractive institutions might prevent entering a path that enables the country to outgrow the US. The current Chinese politics under Xi, with an emphasis on autarky and growing insecurity for entrepreneurs, may result from an extractive regime reaching its limits. Making institutions inclusive would mean letting others than the communist nomenclature participate in power, which the iron law of oligarchy prevents.
  2. As inclusive institutions have to be open to change to allow creative destruction, the ruling elite has to be as broad as possible and time in office has to be limited. That calls for cutting the edges of poverty and unlimited wealth by a functioning social backing of economic activity. Limiting presidential terms like in the US or in France to two terms is the right decision. That rule should be widened to other public offices as well.


Acemoglu & Robinson’s book “Why Nations Fail” is a great read that explains underdevelopment with the persistence of extractive institutions, building upon historical examples that most of us know. But maybe we haven’t seen them in the light of new institutionalism.

Jürgen Dieringer