Why Nations Fail by Daron Acemoglu: A Reflection

There are tons and tons and tons of different theories suggesting the reason of a nation's economic, political or total failure.

Some would suggest that one nation's culture is lazy, another one would tell you that it is because they are not on the Eurasian continent. Even more simpler, quite some people have accepted that residents in tropical areas tends to be lazier and work less, and be dumber than those in Europe.

In the book Why Nations Fail, Daron Acemoglu suggests to us that it is not cultural factors, nor geological factors, but political institutions that decided a country's fate.

His two theories of political systems are respectively inclusive political system and extractive political system. Inclusive political system does not mean a democratic system; it simply means that in this system, more than one party competes for power and shares their interest. Extractive political system does not equal to dictatorship either. It just equals to a political system in which one party or group of people have far extended privilege just against all others, and use that privilege to extract wealth and power.

He starts first to explore the most extracted, the most influenced and damaged by the extractive political system, which is the continent of South America. 500 years ago, the Spanish and Portuguese touched upon the South American land and had since created one of the most extractive, demanding, and inhumane political systems in the world. All wealth produced by the locals was transferred to the Spanish and Portuguese. While they spread disease to the locals, resulting to the near extinction of all indigenous South Americans, the most influential thing that they have spread to the continent is poverty.

Through an extractive political system, wealth that is created is transferred to the people who own power instead of the creator of wealth. This system leads to little or no incentive for innovation, investment and education, for all common people know that their ideas, creation and product of labor will be confiscated or in danger of confiscation.

He has further pointed out that it is incentive that matters. It drives decision making instead of culture, nature or instincts. This is considered a major leap in economic theory and social theory, since incentive combined economic person with psychology while avoiding idealistic models of human decision.

After listing a few countries with staggering economy, political chaos and terrible livelihood, Acemoglu goes on to talk about what we believe is ideal, which is the inclusive political system. In an inclusive political system, multiple parties share interest and control power for minimising conflict and creating an environment that would benefit competition for all parties. Rules would definitely be created to be inclusive towards common people and easier for them to produce their own product and earn their own value created.

With this rule of law and market economy, people would have the incentive to innovate, create and be educated. That would create a positive feedback loop and produce a better economy, better livelihood and better and more transparent political systems.

In his book, he also examined the transition from extractive political systems to inclusive political systems, which is an important topic if the title ties to success of nations. He studied the case of Glorious Revolution in England, which limited the king's power and provides the entry to a more inclusive political system.

However, to me, the limitations of this book are very clear in quite a lot of chapters, as Acemoglu admitted that random factors and coincidences can have a big impact on the transition of two political systems, and it can also happen for an inclusive political system to transform into an extractive one. He has been rather honest, admitting the randomness of such political systems, but in the meantime, the randomness makes his theory a less convincing story of a nation's success.

Anyway, read the book. Love it.