The authors argue that the recipe for success as a nation requires inclusive institutions. We see this starting in 17th century England, where the Glorious Revolution limited the power of the monarchy and transferred power to parliament to create and maintain inclusive institutions.
They argue that monarchy or the elites will naturally favour extractive institutions and impede any innovation and/or technological change that has the potential to change the status quo and potentially reduce their grip on power. Extractive institutions engender a repressive cycle whereby the greater the degree of extraction, the less incentive is there to be productive and the less one is willing to embrace innovation. If the elite is going to take away 90% of what you produce, why bother making more?
The more power that is concentrated, the more vicious the leader must be to hold onto to power. Many will see that as the easiest way to get ahead. Some start off as altruistic but without any push toward creating more inclusive institutions you either have the best case of the ‘middle income trap’ or worse case – a despot. – Animal Farm syndrome.
On the productivity spectrum – slavery vs enjoying 100% fruits of your labour (embrace innovation and technological change to maximise labour output)
Elites come in many forms – not only a ruling class but an economic monopoly is also an extractive institution.
The Western world has a higher level of living standard is essentially the rule of law, excellent property rights, equitable and easily understood laws that protect you and your property to ensure that any fruits of your labour can be enjoyed without the fear of appropriation.
Countries get stuck in the middle-income trap due to political institutions being extractive but allowing growth from a low base (as it suits them to extract from a bigger pie if it does not threaten the elites grip on power) but still being extractive favouring the ruling elite. One of the hallmarks of middle-income countries is the control of media as opposed to developed countries where media rights are sacrosanct.
Growth under extractive institutions will eventually hit a wall as one of the conditions of innovation is the creative destruction of the ‘status quo’ and by extension, a corrosion of the elite’s hold on power. Absolute power corrupts absolutely, and we can extrapolate that down, hence a true democracy has checks and balances on the elites.
Authoritarian growth looks great as they usually start off from having nothing and importing technology and allowing growth under the auspices of an extractive framework – cheap labour with controlled mobility. An example is the USSR’s phenomenal growth rate in the 50-60s before hitting a wall in the 70-80’s because there was no change in the institutions that allowed creative destruction, there was no cycle of renewal, ones that would foster technological advancement and reward innovation.
Modernization theory by Seymour Martin Lipset: All societies as they grow will head towards a civilised democracy, an educated workforce will naturally lead to democracy and more inclusiveness. There are many highly educated people with extractive elites and controlled media. Perhaps it’s a matter of time but the elites will not give up power without a fight, which has never been the way that history has operated.
China will eventually hit the middle-income trap without allowing true Schumpeterian creative destruction which is required for true innovation to arise. Can ‘controlled’ creative destruction can be achieved?
Summary of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu, J., Robinson, J. (2012)