(2021-11-10) Nice Book: Why Nations Fail

Were you dying to read a takedown of racism, colonialism, authoritarianism, absolutism, communism, and anarchism all in a single book? Well, Why Nations Fail is just the book for you!

So a few days ago I finished reading this book. Why Nations Fail is a long and somewhat boring book about... why nations fail. That is, why are some nations richer and have better living standards than other nations, and why does this rich/poor divide persist for centuries? For example, why is Western Europe wealthier than Eastern Europe? (Note: this divide predates communism.) Or why have the living standards of Russia remained relatively poor from the Russian Empire to the Soviet Union to the present Russian Federation? Or why have many (but not all, this is important) African countries remained the poorest and most underdeveloped in the world even after decolonization occurred? Why Nations Fail tries to provide a theory/framework to answer such questions, and it has been quite eye opening for me, even though I've heard the ideas within it expressed in other places before.

What should be mentioned first are the theories of why nations are rich or poor that don't work, or have much counter evidence. The most popular one you may have heard of is geographic determinism, an idea popularized by Jared Diamond, which basically says that some places have better geography and better climates than others that make the civilizations there much better than civilizations in other places. And somehow the better geography of Europe resulted in the industrial revolution happening there first and Europeans exploring the world first. There's another theory that basically says some civilizations have better cultures than others, and this cultural determinism theory points out that of course, Europe's superior culture meant that the industrial revolution happened there first and they had the best ships to explore the world. There is also another more politically correct theory that the book criticizes, but you should check it out yourself.

Anyway, if the geography and culture theories are correct, then they should be easily reproducible with modern examples, right? Well, they haven't been. Look at the Korean Peninsula and the divide between North and South Korea. When both countries split apart after WW2, they had the same climate, a similar geography, the same language, and the same culture. Yet, many decades later North Korea is one of the poorest countries in the world, while South Korea is one of the richest countries in the world. If anything North Korea should have been the richer country today because after the split it had better natural resources, better infrastructure, and also had tons of money poured into it by the Soviet Union. There are a few other examples in the book of these theories clearly not working like a border town on the USA/Mexico border and how the lives of the residents of each side of the border are so different despite them being only miles apart.

The theory of why some nations are better than others that the book puts forward is basically this: The current and historical political and economic systems/institutions of a nation determine how wealthy it is (or will be) better than any other factor. The book splits everything into two types of political and economic institutions: extractive institutions and inclusive institutions.

Extractive economic institutions have little or no private property rights, high taxes (like half your salary or more high), forced labour (slavery, serfdom, etc.), banking services exclusive to a privileged few, limited or no freedom of movement, new innovations blocked by the elites, and either public or private monopolies completely controlling large important sectors of the economy. Inclusive economic institutions have strong private property rights, reasonable taxes, no forced labour, free movement, the ability for anybody to get a loan if their financials make them qualified, welcoming of disruptive new technologies by the government, and most economic sectors being highly competitive and open to new entrants.

Extractive political institutions essentially make it so that political representation is limited to the privileged elites, and anyone who protests or rises up gets violently beaten down to keep them in their unprivileged place. Inclusive political institutions allow a broad cross-section of society to have political representation and decide what laws or taxes do or do not pass. An inclusive political institution doesn't necessarily have to be a complete democracy to be inclusive, but it should be easy for newcomers who aren't connected to the current rulers and elites to acquire some form of representation. There are other factors that the book talks about that divide extractive and inclusive political institutions, but probably the most important one is a free press, which played a huge role in some historical events that led to more inclusive economic or political institutions.

What's interesting is that the type of political or economic institutions that countries have tend to be the same, and almost always it is the case that a country with extractive political institutions will end up with extractive economic institutions. Same case for countries with inclusive political institutions. Another thing that happens is that over time the types of institutions a country has tend to stay the same, even across regime changes. This is what happened in many African countries after decolonialization, the revolutionary anti-colonial governments simply took over the extractive institutions put up by colonial powers. But sometimes the institutions of a country change over time, and that's how the industrial revolution ended up happening first in England.

So historically, basically every civilization has been an extractive one, and this included England. England had an absolutist monarchy with feudalism for centuries, but that monarchy got weaker over time, and more and more people further from the elites connected to the monarchy gained political power. First noteworthy event was the Magna Carta, which moved power away from the monarchy to the barons that surrounded it in 1215. Then the Black Plague killed tons of people in 1348, which reduced the labour supply, which resulted in the peasants acquiring better wages and effectively ending feudalism in England. Then over the years various political struggles and wars pulled more and more power away from the monarchy and into the hands of wealthy businessmen who were not connected to the monarchy until the Glorious Revolution in 1688 established a strong parliamentary system. Parliament then started producing many pro-manufacturing and pro-entrepreneurship policies which basically were the seeds and the fertile ground of the industrial revolution that started in the 1700s. The book goes into more detail about this history, but basically the point is that by slowly over time switching from extractive to inclusive political institutions, England also switched to inclusive economic institutions. Inclusive economic institutions were important here because they allowed and encouraged English entrepreneurs to make the innovations of the industrial revolution, which they would not have been able to do under extractive economic institutions.

One very interesting thing that happened after the industrial revolution in England is that the technologies (machines, factories, and trains) that came from it were actually blocked in other parts of Europe in the 1800s. Most notably in Austria-Hungary and the Russian Empire. The rulers of those countries knew that allowing these technologies to come into their lands would give their subjects the increased freedom and prosperity that was occurring in England, which would deprive the rulers of their power over the people. Here is a map of European railroads in 1870 which is a clear visual representation of this elite resistance to new technology. Note how basically all the countries in continental Europe with good rail networks were ones who were influenced by the French Revolution and Napoleon which gave them more inclusive political and economic institutions that allowed them to have their own industrial revolutions after England got it first.

Other interesting resistance to new things over the fear of non-elite people having more political and economic power happened in the Ottoman Empire and in Imperial China. After the printing press was invented, literacy rates went way up in Europe, and the Ottomans decided that this was bad and could result in them losing their grip on power, so they banned printing. It is not a huge surprise that so much of the Middle East and other parts of the former Ottoman Empire are still underdeveloped to this day because they didn't have good literacy rates for centuries while European literacy rates were approaching the entire population. In China, starting in the 1400s and continuing through the Ming and Qing dynasties, sea exploration, sea trading, and commercial shipbuilding was banned, restricted, unbanned, then restricted again multiple times. The rulers there did not want outside ideas coming into their land and "ruining" their subjects. We could have theoretically had a Chinese Empire comparable to the European Empires, but the Chinese chose to close themselves off at exactly the same time the Europeans were getting out there exploring and conquering. Basically in both Imperial China and the Ottoman Empire, their rulers decided that preserving their extractive institutions was more important than moving forward, and look where they later ended up.

Yeah, so I like this book and I recommend it. One thing you should note is that the book was published in 2012, so everything is written from what was known in those days, but it's still relevant in the present. I've only told a small portion of all the interesting stories and ideas that the book talks about above. I don't think Why Nations Fail is perfect or anything, but it definitely put a lot of things into perspective and really opened my mind at how history could have played out completely differently.

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