Acemoglu and Robinson argue that the difference between inclusive and extractive institutions explains modern global inequality. But truly addressing this inequality also requires understanding what creates inclusive and extractive institutions in the first place. To better understand this, the authors develop a theory of how institutions transform. They argue that institutions tend to change during periods of historical crisis and instability—which they call critical junctures. Nations respond to these crises differently, and their different responses then transform their institutions. For instance, one nation might respond to war by becoming a dictatorship, while another might respond by creating a democracy. Crucially, these different responses depend on how a nation’s institutions are already structured before the crisis. For instance, the country that became a democracy was likely to already have a more egalitarian government than the one that became a dictatorship. However, Acemoglu and Robinson emphasize that both of these factors—the small differences between countries before a crisis and the way they change during a crisis—are difficult to predict. They depend on many historical factors, including randomness and human decisions, so they always could have been otherwise. (As the authors put it, small institutional differences and institutional change are both historically contingent.) Thus, the authors conclude that countries have different kinds of institutions because, in the past, they have responded to historical crises in different ways. During these crises, the small, contingent differences between nations have led them to respond in widely divergent ways, which has fundamentally transformed their institutions in the long term.
Acemoglu and Robinson argue that different societies inevitably develop small institutional differences over time. These differences emerge because all societies have various interest groups that compete for wealth and power. Whichever group gets the upper hand tends to structure institutions in its favor. For instance, because England’s monarchy wasn’t as wealthy or powerful as Spain or France’s in the 1500s, English institutions gave merchants and landowners slightly more power than French or Spanish ones. But this difference was minor and didn’t significantly affect policy until it collided with a critical juncture. These small institutional differences are contingent, changeable, and reversible. For instance, while Spain’s monarchy was very strong in the 1500s, it made many missteps over the next century, which led it to the brink of collapse. The monarchy responded to conflicts with the aristocracy by shutting down tax collection, which prevented it from governing effectively. By the 16th century, the Spanish monarchy was woefully dysfunctional, a fact that illustrates how institutional differences are often the result of unpredictable human and political factors.
Most of the time, these small institutional differences don’t have lasting effects. But during critical junctures, these differences determine how nations respond to crises, which ultimately shapes their long-term economic pathways. In other words, small differences have a big impact when they determine how a society responds to major challenges. For example, in the Middle Ages, landlords in Western Europe generally owned less land than those in Eastern Europe, so they had less wealth and power. Then, the Black Death killed nearly half of Europe’s population. In Western Europe, peasants tended to win higher wages and better working conditions because they were fighting weaker landlords. But in the East, landlords used their power to make conditions far worse for peasants. Thus, while the size of landholdings started out as a small difference between Eastern and Western European institutions, it ended up having serious consequences for the power struggle between workers and landowners. This shows how critical junctures magnify small differences. In many cases, this process is strong enough to send countries down divergent development paths. For instance, before the Industrial Revolution, merchants and businessmen had much more political power in Britain and the US than in China and Russia. Because of this small difference, the British and American governments embraced the Industrial Revolution’s new technologies (which businessmen were eager to adopt). In turn, the US and Britain became even more politically and economically inclusive over time. In contrast, China and Russia’s absolutist rulers sharply rejected new technology because they saw it as a threat to their power. Therefore, a small difference in the balance of power ultimately helped Britain and the US industrialize rapidly and form inclusive economic institutions, while China and Russia did not. This shows that small, historically contingent differences can actually lead nations to build inclusive or extractive institutions—and therefore prosper or stagnate over time.
Institutions are always in flux, but seldom in ways that seriously affect their long-term destiny. However, when they hit critical junctures like the Industrial Revolution, these differences suddenly matter. While Britain’s time as a relative backwater in the Roman Empire scarcely affected its fate, its relatively egalitarian political system in the 18th century helped it become a global economic superpower. In contrast, China was the world’s greatest power for many centuries, but it turned inward before the Industrial Revolution, which led it to economically stagnate until well into the 20th century. And yet, while some differences certainly matter more than others, it can be difficult to identify which ones will shape a nation’s future—after all, critical junctures are inherently unpredictable.
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History and Institutional Change Quotes in Why Nations Fail
By the late 1990s, in just about half a century, South Korean growth and North Korean stagnation led to a tenfold gap between the two halves of this once-united country—imagine what a difference a couple of centuries could make. The economic disaster of North Korea, which led to the starvation of millions, when placed against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.
Opposition to economic growth has its own, unfortunately coherent, logic. Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.
The Black Death is a vivid example of a critical juncture, a major event or confluence of factors disrupting the existing economic or political balance in society. A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On the one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe.
England was unique among nations when it made the breakthrough to sustained economic growth in the seventeenth century. Major economic changes were preceded by a political revolution that brought a distinct set of economic and political institutions, much more inclusive than those of any previous society. […] The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions.
The divergent paths of English, French, and Spanish societies in the seventeenth century illustrate the importance of the interplay of small institutional differences with critical junctures. During critical junctures, a major event or confluence of factors disrupts the existing balance of political or economic power in a nation. These can affect only a single country, such as the death of Chairman Mao Zedong in 1976, which at first created a critical juncture only for Communist China. Often, however, critical junctures affect a whole set of societies, in the way that, for example, colonization and then decolonization affected most of the globe.
These differences are often small to start with, but they cumulate, creating a process of institutional drift. Just as two isolated populations of organisms will drift apart slowly in a process of genetic drift, because random genetic mutations cumulate, two otherwise similar societies will also slowly drift apart institutionally. Though, just like genetic drift, institutional drift has no predetermined path and does not even need to be cumulative; over centuries it can lead to perceptible, sometimes important differences. The differences created by institutional drift become especially consequential, because they influence how society reacts to changes in economic or political circumstances during critical junctures.
The life expectancy of a resident of the Natufian village of Abu Hureyra was probably not that much different from that of a citizen of Ancient Rome. The life expectancy of a typical Roman was fairly similar to that of an average inhabitant of England in the seventeenth century. In terms of incomes, in 301 AD the Roman emperor Diocletian issued the Edict on Maximum Prices, which set out a schedule of wages that various types of workers would be paid. We don’t know exactly how well Diocletian’s wages and prices were enforced, but when the economic historian Robert Allen used his edict to calculate the living standards of a typical unskilled worker, he found them to be almost exactly the same as those of an unskilled worker in seventeenth-century Italy.
The process of political centralization can actually lead to a form of absolutism, as the king and his associates can crush other powerful groups in society. This is indeed one of the reasons why there will be opposition against state centralization, as we saw in chapter 3. However, in opposition to this force, the centralization of state institutions can also mobilize demand for a nascent form of pluralism, as it did in Tudor England. When the barons and local elites recognize that political power will be increasingly more centralized and that this process is hard to stop, they will make demands to have a say in how this centralized power is used. […] The Tudor project not only initiated political centralization, one pillar of inclusive institutions, but also indirectly contributed to pluralism, the other pillar of inclusive institutions.
The Industrial Revolution created a critical juncture that affected almost every country. Some nations, such as England, not only allowed, but actively encouraged, commerce, industrialization, and entrepreneurship, and grew rapidly. Many, such as the Ottoman Empire, China, and other absolutist regimes, lagged behind as they blocked or at the very least did nothing to encourage the spread of industry. Political and economic institutions shaped the response to technological innovation, creating once again the familiar pattern of interaction between existing institutions and critical junctures leading to divergence in institutions and economic outcomes.
In England there was a long history of absolutist rule that was deeply entrenched and required a revolution to remove it. In the United States and Australia, there was no such thing. Though Lord Baltimore in Maryland and John Macarthur in New South Wales might have aspired to such a role, they could not establish a strong enough grip on society for their plans to bear fruit. The inclusive institutions established in the United States and Australia meant that the Industrial Revolution spread quickly to these lands and they began to get rich. The path these countries took was followed by colonies such as Canada and New Zealand.
The leaders of the French Revolution and, subsequently, Napoleon exported the revolution to these lands, destroying absolutism, ending feudal land relations, abolishing guilds, and imposing equality before the law—the all-important notion of rule of law, which we will discuss in greater detail in the next chapter. The French Revolution thus prepared not only France but much of the rest of Europe for inclusive institutions and the economic growth that these would spur.
Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. […] The basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractive institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar—even if their intensity differs.
The changes in economic institutions in China were radical. China broke the mold, even if it did not transform its political institutions. As in Botswana and the U.S. South, the crucial changes came during a critical juncture—in the case of China, following Mao’s death. They were also contingent, in fact highly contingent, as there was nothing inevitable about the Gang of Four losing the power struggle; and if they had not, China would not have experienced the sustained economic growth it has seen in the last thirty years. But the devastation and human suffering that the Great Leap Forward and the Cultural Revolution caused generated sufficient demand for change that Deng Xiaoping and his allies were able to win the political fight.
There is much uncertainty. Cuba, for example, might transition toward inclusive institutions and experience a major economic transformation, or it may linger on under extractive political and economic institutions. The same is true of North Korea and Burma (Myanmar) in Asia. Thus, while our theory provides the tools for thinking about how institutions change and the consequences of such changes, the nature of this change—the role of small differences and contingency—makes more precise predictions difficult.
