Prosperity and Politics

Why Nations Fail:
The Origins of Power, Prosperity, and Poverty
by Daron Acemoglu and James A. Robinson
Crown Publishers, 2012, 529 pp.

MIT economist Daron Acemoglu and Harvard political scientist and economist James A. Robinson have written a book, Why Nations Fail, that doesn’t have a single equation in it. This is a remarkable feat for a 529-page book with five Nobel Laureate endorsements inside the front cover. There is nothing wrong with equations and regressions, but, when economists reduce the world to a model, it means that they are abstracting from some of the very real messiness of the economy, messiness that may actually be important. So, it is exciting to see new economic scholarship that is both accessible to the public and does not require understanding mathematical models.

Why Nations Fail has a simple premise: politics matters. Acemoglu and Robinson weave a far-reaching and beautifully crafted narrative of why some nations grow rich, while others falter. Their central premise argues that there is a “link between inclusive economic and political institutions and prosperity.” They take the reader across the globe, through hundreds of years of history to make the argument that “while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.”

For readers not steeped in economic theory, the idea that politics matters may seem mundane, but in economics, this is a radical idea. In the standard economic model of a market economy power either does not exist or is seen as a distortion. If a firm has too much power in their product market, it is a “monopoly” and considered a special case. If a wealthy individual uses his or her outsized income to influence the political process, this is rent-seeking, a distortion of the standard model, not the normal way things get done. Acemoglu and Robinson put politics in the driver’s seat. They argue that if political power is concentrated among an economic elite and economic policy works for their advantage, growth is hampered.

The book opens with a tale of Nogales, Arizona, and Nogales, Sonora, a city cut in half by a fence along the border between the United States and Mexico. Acemoglu and Robinson ask why these two cities are so different. Why is it that Nogales, Arizona, is far more prosperous than Nogales, Sonora? This example, one among many case studies throughout the book, helps them rebut a variety of other theories about what makes economies grow, including that economies grow because of a particular culture, weather pattern, geography, or policymaker’s lack of knowledge of the “right” economic policies.

According to Acemoglu and Robinson, inclusive political and economic institutions promote growth, while extractive political and economic institutions do not.