The best book I read in 2019

My son is very good at giving good gifts. His all-time winner was Priya, the dog shown on my profile photo. For father's day this year, he gave me the book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Daron Acemoglu and James A. Robinson. It could be viewed as an engaging political and economic history of the whole world, according to a leading economist and political scientist. The book is the fruit and popular presentation of a long research collaboration by the authors, which produced papers such as a mathematical model for political transitions. Examples discussed ranging from the Spanish conquest of the Aztecs to the Mugabe regime in Zimbabwe to China in the twentieth century to the southern USA after the civil war.

To summarise the main ideas I think it is helpful to define the key terminology and concepts in the book. Some of the terminology used seems to me to be slightly different from how it is used by others. A more detailed summary of the book can also be found in these lecture slides.

Creative destruction is the process whereby technical innovations (e.g., steam engines or mobile phones) lead to new companies and new markets that create new wealth for some while also destroying the wealth of some and profitability of other companies. Countries that encourage, produce and embrace innovation grow economically. Those that discourage it, particularly to protect their own markets and monopolies, decline economically.

Extractive political institutions are governments (ranging from national down to counties) that concentrate power with a select few (an `elite') who work to maintain their stranglehold on power, and use their power to enrich themselves. There are few constraints on the power of political rulers. Dictatorship or one-party rule is an example, whether fascist or communist.

In contrast, inclusive political institutions, encourage the involvement of diverse groups in decision making and the formulation of laws and policies. The focus is on the common good. There are checks and balances (a free press, an independent judiciary, the rule of law) that constrain the power of politicians.

Extractive economic institutions are public utilities, banks, and companies, that are set up and used by a select few (an `elite') to extract wealth from others. This is done by corruption, rent-seeking, monopolies, crony capitalism, or opposing innovation.

In contrast, inclusive economic institutions are those that encourage free markets (especially labour markets), competition, and innovation. In particular, participation in economic activity by diverse parties is encouraged, from job opportunities to starting new companies.

There is an intimate connection between the character of economic and political institutions.
There are virtuous cycles whereby inclusive political institutions facilitate the development of inclusive economic institutions and vice versa. Acemoglu and Robinson argue that a key example is how the Glorious Revolution in England in 1688 created conditions that led to the Industrial Revolution, and the consequent economic growth, that made England far richer than most other countries.

In contrast, there are vicious cycles where extractive political institutions facilitate the development of extractive economic institutions and vice versa. For example, if a wealthy company has a monopoly that they wish to protect they will hire lobbyists and donate money to political candidates that will pass laws that reflect their own narrow interests and priorities rather than those of broader society.

The iron law of oligarchy is that if the leaders of an extractive political institution are replaced, particularly in a revolution, that the institution will remain extractive. The autocracy and wealth of the Russian Tsar were replaced with that of the Soviet elite. Arguably, this is also what has happened in the post-colonial era. Colonial governments that extracted wealth from colonies for white European `elites' were replaced with national governments controlled by local `elites' that extract wealth from their fellow nationals.

Watershed moments are key times where a transition in institutions from extractive to inclusive, or vice versa, can happen.

The book provides countless fascinating examples from history to make their case. The key message of the book is that we should be investing in developing and protecting inclusive institutions.  This can only be done by broad coalitions of different groups in society. Thus civil society is very important.

I might disagree a little with the book, perhaps they don't emphasise enough the key role that individuals can play, both for good and for bad, in shaping and reforming institutions. For example, contrast Stalin and Gorbachov, or Mao Zedong and Deng Xiaoping. Servant leaders whose focus is not on themselves but on the common good and who act with integrity can steer things in the right direction.

The authors discuss the amazing story of Botswana. It gained independence in 1966 and was one of the poorest countries in the world. Today, it has the highest Human Development Index (HDI) and GDP per person, and the lowest corruption index of African countries. Since 1966, it has had continuous democratic elections (the longest in Africa). A key role was played by the founding leaders Seretse Khama and Quett Masire.

A question that occurred to me, stimulated by the book, is to what extent have universities become extractive institutions (while marketing themselves as inclusive institutions)?