The cure for abject poverty: a new book argues that inclusive institutions offer the best path to prosperity.

• Author: Bailey, Ronald
• Position: Why Nations Fail: The Origins of Power, Prosperity, and Poverty - Book review

Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Daron Acemoglu and James Robinson, Crown Business, 544 pages, $30

HUMANITY'S NATURAL STATE is abject poverty. So how did some humans manage to claw their way to prosperity? An insightful new book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Massachusetts Institute of Technology economist Daron Acemoglu and Harvard University economist James Robinson, provides an answer to that perennially urgent question.

The book is somewhat misnamed since it really deals with why some nations succeed. The answer, in a word: institutions. Acemoglu and Robinson argue that since the Neolithic agricultural revolution, most societies have been organized around "extractive" institutions--political and economic systems that funnel resources from the masses to the elites. Once they get on the gravy train, the elites are wary of economic growth, since it could destabilize the social and political arrangements that make them rich.

By contrast, "inclusive" political and economic institutions generate a virtuous circle of sustained economic growth. Although the authors don't say so, the nature of these inclusive institutions is succinctly captured by the concept of liberty, defined as freedom from arbitrary or despotic government. Historically speaking, such institutions are a recent phenomenon.

The institutions that produce economic growth, Acemoglu and Robinson show, inevitably threaten the power of reigning elites. The key idea of their theory: "The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people." Thus throughout history reactionary elites have resisted innovation because they correctly worried that it would jeopardize their status.

Every set of extractive institutions is extractive in its own way, while all sets of inclusive institutions are inclusive in pretty much the same way. Ancient Rome had slave power, Imperial China had strict limits on domestic and foreign commerce, Russia had serfdom, India had hereditary castes, the Ottoman Empire had tax farming, Spanish colonies had indigenous labor levies, sub-Saharan Africa had slavery, the American South had slave labor and later a form of racial apartheid, and the Soviet Union had collectivized labor and capital. The details of extraction differed, but the institutions were organized chiefly to benefit elites.

Inclusive institutions, by contrast, are similar to one another in their respect for individual freedom. They include democratic politics, strong private property rights, the rule of law, enforcement of contracts, freedom of movement, and a free...