13 June 2012

Acemoglu and Robinson: Why Nations Fail

In a generally deferential and ineffective Congressional spectacle, some say minuet and I think kabuki dance, Jim DeMint's 'questioning' of Jamie Dimon, who responded to most serious questions with poker faced whoppers, today pushed me over the edge, and so putting the internet feed on mute, I thought I would take a moment to bring the study Why Nation's Fail by Acemoglu and Robinson to your attention.

"Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people,” write Acemoglu and Robinson. Extractive institutions, whether feudalism in medieval Europe or the use of schoolchildren to harvest cotton in contemporary Uzbekistan, transfer wealth from the masses to elites.

In contrast, inclusive institutions—based on property rights, the rule of law, equal provision of public services, and free economic choices—create incentives for citizens to gain skills, make capital investments, and pursue technological innovation, all of which increase productivity and generate wealth. Economic institutions are themselves the products of political processes, which depend on political institutions. These can also be extractive, if they enable an elite to maintain its dominance over society, or inclusive, if many groups have access to the political process. Poverty is not an accident: “Poor countries are poor because those who have power make choices that create poverty.” Therefore, Acemoglu and Robinson argue, it is ultimately politics that matters.

The logic of extractive and inclusive institutions explains why growth is not foreordained. Where a cohesive elite can use its political dominance to get rich at the expense of ordinary people, it has no need for markets and free enterprise, which can create political competitors. In addition, because control of the state can be highly lucrative, infighting among contenders for power produces instability and violence. This vicious circle keeps societies poor.

In more fortunate countries, pluralistic political institutions prevent any one group from monopolizing resources for itself, while free markets empower a large class of people with an interest in defending the current system against absolutism. This virtuous circle, which first took form in seventeenth-century England, is the secret to economic growth."

James Kwak, Failure Is An Option, A Review of Why Nations Fail

As you know I have often said that in a sovereign fiat currency, inflation and deflation are a policy decision.

Acemoglu and Robinson take this premise a broad step further, and show through many historical examples that national success or failure, as one might define it in terms of the broadest happiness and success for the most people, is also the result largely of policy decisions.

Neither austerity or stimulus will be effective in restoring growth to the American economy. Most if not all of the pain of austerity will fall on the hapless victims and the disenfranchised innocent, while most of the profits of recovery through stimulus will flow to the one percent. No matter what strategy you may employ, it is difficult to be successful against a stacked deck in a rigged game.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

Why Nations Fail

I would tend to add to what Robinson has to say that extractive economic institutions tend to actively promote and fund extractive political movements, laws, public policy, and systems of both the left and the right. Even the subversion of effective government and a descent into near anarchy can serve the monied interests, because effective democratic government is a counterbalance against private power.

At their extremes, neither communism nor fascism nor corporate capitalism are much different, as they both become extractive for the benefit of a small elite at the expense and misery of the people.