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The Logic of Global Capitalism

Why Nations Fail has been widely praised for its explanatory power. But it oversimplifies the workings of global capitalism.

The plague in Rome, one of the critical historical junctures highlighted in Why Nations Fail.

Daron Acemoglu and James Robinson’s bestselling 2012 book Why Nations Fail: The Origins of Power, Prosperity, and Poverty addresses one of the most pervasive questions in the social sciences: why do some nations get rich, while others remain poor?

The book has received rave reviews from mainstream figures: New York Times columnist Thomas Friedman calls it “fascinating” and Jared Diamond thinks it should be “required reading,” while prominent scholars like Dani Rodrick, Robert Solow, Kenneth Arrow, and Francis Fukuyama all praise the book’s breadth and depth.

A central source of the book’s appeal is that Acemoglu, an economist, and Robinson, a political scientist, present a relatively simple answer to this longstanding conundrum: some nations develop inclusive institutions that foster sustained economic growth and wealth creation, but many others endure (and reproduce) extractive institutions that block the potential for long-term growth. These latter nations might experience ephemeral bursts of affluence (such as the Soviet Union), but they won’t achieve true prosperity in the long run.

Why? After examining the historical trajectories of countries around the world, Acemoglu and Robinson conclude that inclusive institutions — centralized but pluralist government, secure but broadly distributed property and political rights, the unbiased application of law, and competitive markets — generate economic incentives that produce constant innovation.

With the right institutional framework, the pair argues, specific social forces like entrenched elites are unable to limit competitive pressures or control the impact of innovations. As a result, what Joseph Schumpeter called creative destruction — the constant obliteration of existing ideas, institutions, organizational strategies, and firms, and the simultaneous emergence of new ones — is allowed to work its magic. The payoff is continuous, long-term growth.

But most countries — for reasons Acemoglu and Robinson attempt to explain — never develop inclusive institutions. Instead, their institutions are extractive, designed to maximize the ability of a small social subset (elites) to plunder resources.

Acemoglu and Robinson say that because access to wealth and control over the levers of political power are strongly connected, ruling elites in these countries try to restrict competition and limit innovation. Besides constraining creative destruction, these institutional arrangements produce an all-or-nothing environment in which serious challenges by competing elites result in infighting and political instability.

The authors insist their theory explains the persistence of poverty in certain countries. Once in place, inclusive and extractive institutions act in synergy with distinctive economic incentives and outcomes. In a virtuous cycle, inclusive arrangements spur innovation and social mobility, and strengthen competitive politics. But in a vicious cycle, extractive institutions facilitate resource capture by local elites, who use the bounty to further cement their power.

Through these virtuous and vicious synergies, inclusive and extractive institutions tend to calcify, persisting across time and space and further hardening when their nations reach critical junctures. For Acemoglu and Robinson, this is the key to understanding why some countries can’t seem to escape poverty while others enjoy prosperity decade after decade.

They go back to the sixteenth century to prove their point. It was then, the authors argue, that Eastern and Western Europe greatly diverged — with the West going inclusive and the East going extractive — because the peasantry had very different relative bargaining power in the two regions.

In the critical event of the period — the plague — land tenure arrangements became more inclusive in the West but not the East of Europe. Facing comparatively weaker landlords, the peasantry in Western Europe (and England in particular) was able to push for greater freedoms, bringing higher wages and higher political status, while the peasantry in Eastern Europe saw freedom severely curtailed by landlords.

While the initial differences in bargaining power were not huge, Acemoglu and Robinson explain, the respective routes taken (toward inclusive or extractive institutions) became more entrenched over time.

Acemoglu and Robinson’s long-term perspective isn’t totally path dependent, however. Whether countries adopt more inclusive political and economic institutions is contingent on the level of struggle — the extent to which those who are not part of the dominant elite (other elites and non-elites) to push for incorporation, particularly during critical moments (like the plague, Atlantic expansion, and the end of slavery).

In the case of England, for instance, its sixteenth-century institutional shift was “based not on consensus but, rather, [was] the result of intense conflict as different groups competed for power, contesting the authority of others and attempting to structure institutions in their own favor.”

This attunement to power is one of the main reasons Acemoglu and Robinson’s account has become so appealing in development policy circles — the emphasis on politics and power relations is seen as an explicit challenge to alternative explanations of wealth that focus on factors like geography, education, or culture.

For the authors, “it is politics and political institutions that determine what economic institutions a country has.” For example:

The modern Democratic Republic of Congo remains poor because its citizens still lack the economic institutions that create the basic incentives that make a society prosperous. . . . These are still in place after all these centuries because political power continues to be narrowly concentrated in the hands of an elite who have little incentive to enforce secure property rights for the people, to provide the basic public services that would improve the quality of life, or to encourage economic progress. Rather, their interests are to extract income and sustain their power.

Despite their emphasis on politics — and despite the excitement over their book in development circles — the authors don’t claim solutions easily flow from their framework. Indeed, they urge great caution in trying to extrapolate specific policies from successful experiences, and say there is no single model for inclusive institutions. Institutions bear the imprint of the contingent, evolving political balance of forces in specific times and places. What works in one place might not work in another.

However, Acemoglu and Robinson do say that even countries with little history of inclusive institutions have the capacity to develop them. For example, they argue that China’s extraordinary rates of growth over the past two decades are attributable to its modest adoption of salutary institutions, but that unless these arrangements are more broadly embraced, the remaining extractive institutions will take over and likely bring growth to a halt.

Conversely, the authors don’t believe the endurance of the institutions they laud is inevitable — just because countries get rich doesn’t mean they’ll stay prosperous. Using several historical examples (Roman decline in the second century BC, Venice in the thirteenth and fourteenth centuries, Argentina in the twentieth century), they argue that at certain conjunctures nations might undergo a rapid move away from inclusion and toward extraction.

The argument in Why Nations Fail is undoubtedly appealing. The theoretical contrast between inclusive and extractive mechanisms is clear and straightforward, and the explanation’s political thrust is a welcome change from development theories that focus on culture or geography. But once the authors try to use these abstract arguments to construct a sweeping historical narrative, the exercise becomes forced and ignores the complexities of global capitalism and the inequality it produces.

Take slavery. Drawing on his previous academic work, Acemoglu sees creative destruction as a process that is largely restricted to the sphere of technological innovation (and often more specifically to manufacturing). Therefore, slavery is treated simply as an extractive mechanism incompatible with true innovation and the sustained, long-term growth of wealth.

But is this really the case? Isn’t the historical lifespan of slavery quite long compared to that of wage labor? Didn’t the expansion of the slave trade itself represent a particular kind of Schumpeterian innovation (who definitely did not limit creative destruction to technological innovation)? Didn’t the spread of plantation agriculture throughout the colonial world itself represent an innovative process?

Rent, extraction, and plunder are constituent parts of innovation and change in capitalism; when the authors restrict their understanding of how global capitalism evolves over time to artificial ideal types this fact gets lost.

Indeed, part of what makes the overall theoretical argument in Why Nations Fail so simple and straightforward is the vagueness with which institutions are defined. Readers might have an intuitive sense of what the authors mean by inclusive institutions and extractive institutions, and can draw on this intuition to validate Acemoglu and Robinson’s contention.

But if we set more precise boundaries to distinguish between the two types of institutional set-ups, it becomes much harder to make the case that most countries are characterized by the prevalence of one kind of institutions or the other. Instead, we would most likely find that inclusive and extractive logics often operate side-by-side — and that capitalism thrives on the combination of both logics.

National citizenship is a good example. The institutional arrangements implicit in national citizenship, in most places, include criteria that historically have granted some parts of the population access to, and rights within, politics and institutions. But simultaneously, other populations (e.g., in different times and places, women, racial minorities, citizens of other nations) are excluded.

Moreover, by naturalizing the existence of nations, by adopting them as self-evident units of analysis, the authors make it impossible to critically examine the hybrids and tensions that result when inclusion and extraction coexist (on both a micro and a macro scale) — as they have in all societies.

Rather than being circumscribed by the boundaries of the modern nation-state, capitalism is better understood as a global, historical phenomenon characterized by the uneven combination of systems (inclusive and extractive arrangements, plus creative destruction).

Several decades ago, the social science literature attributed world inequalities to cultural traits: some nations were blessed with attributes that fostered entrepreneurship and innovation, while others failed to take off due to an abiding fatalism. This perspective was intensely criticized for failing to accurately identify relational mechanisms of inequality and power.

To their credit, Acemoglu and Robinson don’t fall into the culturalist trap. They emphasize the importance of struggle, highlighting the historical significance of political and social mobilization by the excluded. This is a good thing.

But just like the modernization theorists in the past, the new “institutionalist” perspective tends to naturalize nations as if they exist in relative independence of one another. Just as development theories in the 1950s used beliefs and attitudes to purportedly explain the advance of modernization or the persistence of “backwardness,” so too are Acemoglu and Robinson throwing up a reductive theoretical framework, organized around a proposed dichotomy between sets of institutional arrangements that either promote or limit long-term prosperity and wellbeing.

Similar to in the 1950s, many observers today consider the theoretical simplification of the new institutionalists appealing and easy to digest. But for others, myself included, the task of accurately identifying the relational processes that produce and reproduce global capitalism — and the historical inequality it engenders — remains as urgent as ever.