Book Review: 'Why Nations Fail'

by: Hazel Henderson

This magisterial book is a tour throughout the world and our human history, examining the persistent puzzle of why some countries successfully industrialized and others failed. MIT economist Daron Acemoglu and James A. Robinson, a political scientist and economist at Harvard, go beyond economics and its centuries of hypothesizing about economic development, trashing current theories and earlier dogmas with evidence of deeper causes for inequality. The authors also contest much of the cultural analyses in influential works of David Landes in his persuasive The Wealth and Poverty of Nations (1999) and Jared Diamond in Guns, Germs and Steel (1999), as well as Diamond's theories of ecological over-exploitation in Collapse (2004). All were relied on by Jeffrey Sachs in his search beyond his academic economics training in his The End of Poverty: Economic Possibilities for Our Time (2006).

Acemoglu and Robinson find that economic inequality, poverty gaps and stagnant economies are everywhere caused by dominant elites, of whatever ideological persuasion, who were able to extend and maintain their power over other groups. Designing exclusionary laws and extractive political institutions, they deliberately sought to prevent widespread development in their societies which might challenge their dominance. Politics is primary and shapes economic institutions and outcomes.

The authors document in enthralling detail the lengths to which elites have gone to control their populations, from the Spanish conquistadores in Latin America; England's kings; Russia's czars and later Soviet dictators; Dutch colonists in the Indonesian archipelago; China's emperors; Japan's shoguns to US plantation owners. Complete with revealing pictures and photographs, we see how these power-seeking elites created hierarchies that prevented economic development while extracting wealth from their own populations. The authors followed the see-saw struggles in many countries to overthrow these elites and describe how in some countries they succeed in reforming oppressive laws and extractive institutions. This allowed the technological flowering of the Industrial Revolution to create widespread economic development and more just, inclusive political institutions, as in the USA, Canada, Australia, New Zealand, Japan, European and other OECD countries.

The authors employ multi-disciplinary systems approaches using chaos theory, morphogenetic models showing both positive and negative feedback - combined with circumstances and critical junctures - to show why these forces produced the unequal, divergent results: vicious or virtuous circles in each country. Such evolutionary, morphogenetic models pioneered since the 1980s (which I explain in my Politics of the Solar Age,1981, 1988) show how a small difference in initial conditions can amplify rapidly and push a system over thresholds, causing its structure to irreversibly change. This compares with economic models that are based on equilibrium (which makes the math work!) but which are abstracted from their embedding in the larger political and social dynamics. All human societies are also based on specific geographical ecosystems and resources on which all human development relies.

This is the reason why economic theories and assumptions are failing as well as the financial models on which they are based: efficient markets, rational actors, Modern Portfolio Theory, Value-at-Risk, etc. However, Acemoglu and Robinson cannily provide themselves with protective cover from attacks by soliciting comments from such fading octogenarian gurus in the economics profession as Kenneth Arrow, Gary Becker, Robert Solow, as well as Michael Spence and Peter Diamond - all winners of the Bank of Sweden Prize in Memory of Alfred Nobel (now repudiated by lawyer Peter Nobel and other members of the Nobel family).

Thus the dismal story of economics' failure to understand the processes of economic development is laid bare - foiling all the official happy talk from World Bank, IMF and other such reports hailing successes in poverty reduction. These are generally based on cherry-picking data, for example, on China's preeminent success in reducing poverty. Other economic studies isolate trivial anecdotal cases or focus on the psychology of the victims of inequality, downplaying their place in the social structure as does Esther Duflo. Other economists use ecological theories such as Jared Diamond's in Collapse as does Jeffrey Sachs since he became Director of the Earth Institute at Columbia University. Few economic textbooks dig deeper into the politics of money-creation and credit-allocation, which we now see underlying extractive political and economic structures. Thus, virtually all economists take money systems for granted and base their analyses and statistics on money flows. Acemoglu and Robinson widen their analyses but also fail to examine the deeper politics of money-creation and credit-allocation.

This book may shake up the complacency of the economics profession - or may just be ignored, as usually happens with such fundamental critiques. The authors also deflect criticism by citing the importance of markets, property rights and trade; by frequent use of Schumpeter's famous theory of "creative destruction." They show many examples of how new technologies were throttled by dominant elites and incumbent industries - just as we see today. The battles being fought by the fossil fuel and nuclear industries are to retain their massive public subsidies and prevent the disruptive technologies of the emerging cleaner, greener information-rich companies of the coming Solar Age. The book also illuminates how the financialization of the world economy mushroomed into the mother of all bubbles and why it will keep producing crises and meltdowns continually devastating the real economies on which we rely.

Sadly, Acemoglu and Robinson are silent on the deeper story of the politics of money-creation and credit-allocation, the role of central banks and "technocrats" in controlling money supplies, imposing "austerity" on their populations as demanded by financial elites, as we see in Europe. Their theory and documenting of elite power-grabbing can equally apply to Wall Street's regulatory capture of Washington. Another case in point is Rupert Murdoch's News Corporation's capture of both Labor and Conservative parties in Britain and their influence over US politics through their media properties: the over 40 TV stations of Fox News Network, the Wall Street Journal, the New York Daily News and the National Review.

The authors correctly identify the power of mass media and social networks and other internet platforms and how these are also captured by powerful interests. Indeed, this is why in 2004, I founded Ethical Markets Media (USA and Brazil) whose mission is to reform markets and metrics while growing the green economy globally. Mainstream media are controlled through concentrated ownership by incumbent industries and they rely on their advertising revenues to fund program content and news gathering. Thus, mass media also amplify the power of elites and become apologists for their extractive policies. In a very real sense, we all live in "mediacracies," whether they are democracies, dictatorships, feudalistic, kleptocracies or theocracies. Mass media purvey entertainment and cultural values, whether consumerism, religiosity, styles in music, art or fashion and are in reality the main source of information and "education" in our global Information Age. This may account for the gender blindness of this otherwise wonderful book, which overlooks the male-domination of virtually all the elites the authors examine and the six thousand years of patriarchal rule in human societies from which we are slowly emerging. This problem of gender-blindness is deeply rooted in most human institutions and goes deeper than the theory-induced blindness described by Daniel Kahneman (2011) from which both Acemoglu and Robinson have recovered, as evident in this splendid book.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.