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Why Nations Fail

This will serve as the basic structure and outline for the page I would like to improve. There are several goals I would like to reach in helping improve this article. First of all, I want to enrich the contents of the page, as the current page only touches upon the very surface of the book contents and doesn't delve into the real arguments and case studies the book has laid out. Second, I want to delve into the theoretical groundings of the book - including the econometric, game theory and statistical models and try to connect them to the major arguments and explain them in a simple way. Lastly, I want to capture the conversations invoked by this book in academia.

(Question: how long should we expect our work to be?)

Structure

The book is structured into fifteen chapters:

• 0. Preface
• 1. So Close and Yet So Different - Why Egyptians filled Tahrir Square to bring down Hosni Mubarak and what it means for our understanding of the causes of prosperity and poverty
• 2. Theories That Don't Work - Poor countries are not poor because of their geographies or cultures, or because their leaders do not know which policies will enrich their citizens
• 3. The Making of Prosperity and Poverty - How prosperity and poverty are determined by the incentives created by institutions, and how politics determines what institutions a nation has
• 4. Small Differences and Critical Junctures: The Weight of History - How institutions change through political conflict and how the past shapes the present
• 5. "I've Seen the Future, and It Works": Growth Under Extractive Institutions - What Stalin, King Shyaam, the Neolithic Revolution, and the Maya city states had in common and how this explains why China's current economic growth cannot last
• 6. Drifting Apart - How institutions evolve over time, often slowly drifting apart
• 7. The Turning Point - How a political revolution in 1688 changed institutions in England and led to the Industrial Revolution
• 8. Not On Our Turf: Barriers to Development - Why the politically powerful in many nations opposed the Industrial Revolution
• 9. Reversing Development - How European colonialism impoverished large parts of the world
• 10. The Diffusion of Prosperity - How some parts of the world took different paths to prosperity than Britain
• 11. The Virtuous Circle - How institutions that encourage prosperity create positive feedback loops that prevent the efforts by elites to undermine them
• 12. The Vicious Circle - How institutions that create poverty generate negative feedback loops and endure
• 13. Why Nations Fail Today - Institutions, institutions, institutions
• 14. Breaking the Mold - How a few countries changed their economic trajectory by changing their institutions
• 15. Understanding Prosperity and Poverty - How the world could have been different and how understanding this can explain why most attempts to combat poverty have failed

Main Arguments

I would also like to improve the contents summary of the book and provide more summaries of different theories inside the book.

The major thesis of Acemoglu and Robinson is that economic prosperity depends above all on the inclusiveness of economic and political institutions. Only a functioning democratic and pluralistic state which guarantees the rule of law is able to exploit the ideas and talents, which are spread among the whole population of a nation. In extractive systems (autocracies) however, entrepreneurs and citizens have no incentives to invest in and work on innovations, which are necessary to create prosperity, because the ruling elites are afraid of creative destruction. Creative destruction would fabricate new groups which competed for power against ruling elites. Hence, elites would lose their exclusive access to the economic and financial resources of a country. The authors bring in the emergence of democratic pluralism in Great Britain after the Glorious Revolution in 1688 as being decisive for the Industrial Revolution as an example as well as the fall of the Soviet Union.

Theories

To put it briefly, there are two major underlying theories behind the book. The first one is about transition to democracy - why some countries transitioned to democracy and some didn't. Second, how democracy helps with economic growth. Below, I will explain briefly the motivating questions and elements of those two theories.

Democratic Transition

Theory on democratic transition comes from Acemoglu and Robinson's publication in The American Economic Review, a paper called A Theory of Political Transition. This paper studies the reason behind oscillations between non-democracy and democracy based on the history of democratization of Western Europe and Latin America. The paper emphasizes the role of the threat of revolution and social unrest in leading to democratization and the desire of the rich elite to limit redistribution in causing switches to nondemocratic regime.

To understand the theory of the paper, there are several fundamental assumptions and/or simplifications of the paper. First, the society is simply divided between a small rich ruling class and a large poor class. Second, the scenario of regime can only be democratic and nondemocratic. Third, people's preference in society is defined by a singularly linear dimension, which means people only care about the monetary redistribution by the ruling class. Forth, people do not only care about redistribution today, but also redistribution in the future. Therefore, democracy comes in a form that guarantees the future redistribution for the people. Fifth, the economic output fluctuates year by year, which means the cost of revolution varies at different times. Last and most important of all, each individual in society all tries to maximize his or her utility.

Under those assumptions, we start from a nondemocratic society in which a small rich group controls most of the wealth and rules the poor majority. For the rich as ruling class, they receive taxation from the economy's output and they decide on the taxation rate. For the poor majority, they can either take what is left for them - the remaining economy's output divided by the population size - or they can revolutionize against the ruling class with a certain cost - payoff being the benefit of revolution minus the cost of revolution. Under this circumstance, the payoff of the rich ruling class is split between, when the poor revolutionizes, the punishment for the ruling class and when the poor acquiesces, the taxation income. This thus becomes a two-stage sequential game in which the rich first decide on the taxation rate and level of redistribution and then the poor decide later whether they should revolutionize. Because of the potential loss of economic benefits due to revolution, the rich wants to propose the taxation rate that would not instigate the poor as much as they can to avoid revolution but not so much that the rich don't have enough benefits. Democratization thus refers to the situation where the rich increases redistribution and franchise to the poor to avoid revolution. Just to summarize, there are several variables that determine the decision making of both sides:

E - Economy's output of a certain year

C - Cost of revolution

P - Punishment for the ruling class if revolutionaries take over

t- Tax rate imposed by the rich

B - Benefits of revolution

For the poor, the payoff without revolution is given by E*(1-t) and that with revolution is given by B-C; for the rich, the payoff without revolution is given by E*t and that with revolution is given by -P.

Given the variables above, it is easy to see the comparative statics that:

Variable	Action	Poor Payoff Without Revolution	Poor Payoff With Revolution	Rich Payoff Without Revolution	Rich Payoff With Revolution	More Likely to Democratize?	Why
E	Decrease	Lower	Unchanged	Lower	Unchanged	Yes	The cost of revolution for both rich and poor is lower during recessionary episodes of the economy; therefore rich is more willing to give up rights and benefits to the poor in order to prevent revolutions
C	Decrease	Unchanged	Higher	Unchanged	Unchanged	Yes	With lower cost of revolution (for example, if one is unemployed vs. employed, the cost is much lower when unemployed), the poor tends to resort more to revolution; the rich would thus grant more benefits to the poor to prevent that from happening
P	Higher	Unchanged	Unchanged	Unchanged	Lower	Yes	If the punishment for revolution is higher for the rich, the rich would want to avoid it by further sharing benefits and rights with the poor
B	Increase	Unchanged	Higher	Unchanged	Unchanged	Yes	If the benefits for revolution is higher, revolution appeals more to the poor and thus the rich again, have more incentive to redistribute

Based on the analysis above, it is not hard to conclude that the threat of revolution is threatening the rich constantly to democratize. This theory also resonates with Clark, Golder and Golder's paper Power and Politics: Insights from an Exist, Voice and Loyalty Game, in which the government decides between predate and not to predate citizens based on the payoff while the citizen has the option to exit (e.g. migrate to other countries), remain loyal and voice their concerns at a cost (e.g. protest). Similarly, this game also provides insights into how variables like exit payoff, cost of voicing and value of loyalty change state's behavior as to whether or not to predate.

Institutions and Economic Performance

The second part of the theory intends to explain how political institutions affect economic performance, in the paper by Acemoglu and Robinson. Institutions as the Fundamental Cause for Long-Run Growth.. Under this theory, Acemoglu and Robinson are trying to explain the different level of economic development of all countries with one single framework. To put in simple words, the causal effect starts from political institutions and distribution of resources of a country in period t. Political institutions in period t determines the by-law distribution of political power, while the distribution of economic resources determines the real distribution of political power. With the effect of both by-law and real political power distribution, they affect the economic institutions as in how production is carried out as well as how the political institutions will be shaped in the next period. Economic institutions also determine the distribution of resources for the next period.

For example, in the case of democratization of Europe, especially in England, in period t, political institutions were dominated by the monarch and therefore the by-law determines the supreme power of the monarch. However, because of the increasing trade, the real political power also went beyond the monarch to the new rising merchant class. Because the merchant class contributed to a significant portion of the economic output as well as the tax income for the monarch, the interaction of the two political powers gave rise to the political institutions that favored merchant class and the economic institutions that protect the interests of merchant class and redistributed more to the merchant class. This cycle gradually empowered the merchant class, powerful enough to take down the system of monarchy system in England and to guarantee the efficient economic institutions.

The theory of interaction between political and economic institutions is further corroborated byThe Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth, a paper by Acemoglu, Johnson and Robinson, specifically talks about the rise of Europe after 1500 in terms of its economic power. The paper finds that the Atlantic Trade (slavery, commodities and so on) after 1500 increased profits from trade and thus created a merchant class that was in a position to challenge monarchial power. By conducting regression analysis on the interaction variable between institution type and Atlantic trade, the paper also proves an interaction between Atlantic Trade and the political institution: the presence of absolutist monarch power hampers the effect of Atlantic Trade on economic rise.

Critical Junctures

XXX

More Sources:

1. Acemoglu, Cantoni, Johnson and Robinson - From Ancien Régime to Capitalism: the Spread of the French Revolution as a Natural Experiment
2. Acemoglu, Johnson and Robinson - the Colonial Origins of Comparative Development: an Empirical Investigation
3. Acemoglu, Johnson and Robinson - Geography and Institutions in the Making of the Modern World Income Distribution
4. Acemoglu, Johnson and Robinson - An African Success Story: Botswana
5. Acemoglu and Robinson - Why Did the West Extend the Franchise? Growth, Inequality and Democracy in Historical Perspective
6. Acemoglu and Robinson - Political Losers as Barriers to Economic Development
7. Acemoglu and Robinson - Economic Origins of Dictatorship and Democracy
8. Acemoglu and Robinson - Economic Backwardness in Political Perspective
9. Acemoglu and Robinson - Persistence of Power, Elites and Institutions

Alternative Theories

Acemoglu and Robinson direct refutes several theories that try to explain democratization and economic performance from a non-institutional perspectives.

Culture

Talk about arguments like Max Weber's argument that Protestant value system attributes to the economic rise in Europe.

Geography

Talk about how geography determines economic development.

Ignorance

Theory mentioned in the book (Why Nations Fail).

Soft-liners and Moderates

Talk about the democratic transition theory based on whether

Reception

Here I will talk about the critics (mostly from academia) on the book. It will be sheer comments, rather than a theory developed against it.

Source 1: Peer Vries - Does wealth entirely depend on inclusive institutions and pluralist politics? A review of Daron Acemoglu and James A. Robinson, Why nations fail

Source 2: Charles du Granrut - Institutions and the Progress of Nations: On Daron Acemoglu and James Robinson's Why Nations Fail

Source 3: W. Bentley MacLeod - On Economics: A Review of "Why Nations Fail" by D. Acemoglu and J. Robinson

Source 4: Michele Boldrin, David K. Levine and Salvatore Modica - A Review of Acemoglu and Robinson’s Why Nations Failhttp://www.dklevine.com/general/aandrreview.pdf

Source 5:

Jeffrey Sachs

According to Jeffrey Sachs, the major problem of Why Nations Fail is that it focuses too narrowly on domestic political institutions and ignores other factors like technological progress, geopolitics, just to name a few. For example, geography plays an important role in shaping institutions, like the weak government in West Africa is exactly shaped by the unnavigable rivers in the region. Another major question Sachs has is Acemoglu and Robinson's pre-assumption that authoritarian regime can definitely not motivate economic growth. Several examples in Asia, including Singapore and South Korea, easily refute Acemoglu and Robinson's arguments that democratic political institutions are the pre-requisites for economic growth. Moreover, Acemoglu and Robinson overlooks macroeconomic factor like technological progress (e.g. industrialization and information technology).

In response to Sachs' critique, Acemoglu and Robinson replied on their book blog with twelve specific points. First, on the role of geography, Acemoglu and Robinson do agree the role of geography in shaping institutions but do not recognize, again, the deterministic role of geography in economic performance. Second, on the positive role authoritarian government plays in economic growth, especially in the case of China, the fast economic growth could be part of the catch-up effect. However, it doesn't mean that authoritarian government is better than democratic government in promoting economic growth. It is still way too early, according to Acemoglu and Robinson, to draw a definite conclusion solely based on the example of China. Lastly, on industrialization, they respond by pointing on the contingency upon institutions for industrialization in order to take effect.

Based on Acemoglu and Robinson's response, Sachs wrote another response on his personal website. Rather than replying to the specificities of their reply, Sachs proposes the structural differences between two groups of scholars and comments on them. According to Sachs, he disagrees with the historical determinism Acemoglu and Robinson propose - as he doesn't believe that the actions taken by colonists two hundred years ago have any power in explaining the economic performance today. Sachs insists on retaining complexity (geography, technological progress etc.) in explaining differences in economic performance, rather than just simplifying as one factor (institutions). As Sachs describes, the evidence suggests that economic development is a multi-dimensional dynamic process, in which political, institutional, technological, cultural, and geographic factors all play a role.  Such a view of history might not be “powerful” in the sense they would like, but it has the virtue of being accurate and useful.

Francis Fukuyama

Francis Fukuyama criticizes, in his article on The American Interest, Acemoglu and Robinson's approach and argument is very similar to a book by North, Wallis and Weingast in 2009 called Violence and Social Order. Second, Fukuyama argues the conception of states only being inclusive versus extractive is over-simplifying the problem. Third, Fukuyama also points out that the approach is too conceptual and fails to unpacking the practical meaning of different institutions. The historical approach to prove the argument is also subjected to interpretation. Finally, Fukuyama specifically points out that the argument by Acemoglu and Robinson does not apply to the case of modern China, as China has a "bad" institution but still flourishes economically.

In response to Fukuyama's comments, Acemoglu and Robinson replied on their blog. First, Acemoglu and Robinson agrees on the similarity to North, Wallis and Weingast's work but explains that they build on and complement each other's work. Second, on the criticism of over-simplification, they reply by describing the over-simplification as an approach to decompose the complicated political institutions. Third, on the degree of conceptuality, Acemoglu and Robinson respond by saying that it is necessary to conceptualize and not to focus too narrowly on a single aspect of institutions. Lastly, on China, they attribute the rapid economic growth in China to the some (but yet limited) level of inclusiveness, as also seen in the example of Soviet Union in the 1970s.