Why Nation’s Fail is an ambitious and worthwhile attempt to understand the origins of power, prosperity, and poverty. It provides a succinct narrative for how institutions may diverge. The many examples that show this divergence are entertaining and informative. However, Acemoglu and Robinson’s unwillingness to incorporate the well-established toolkit of public choice economics hobbles their analytical narrative. Ultimately, they fail to make their case – and make no mistake it is an important case to make – because they ignore the individual and they ignore history.
Acemoglu and Robinson in their book “Why Nations Fail” argue that Venice — the global superpower of its day — became a museum because inclusive institutions like the “commenda” were slowly replaced by extractive institutions which led to the “La Serrata.” Venice effectively became a hereditary aristocracy because the election system was rigged to favor incumbents and their families. Congressional districts in the United States are often redrawn in a way that favors incumbents. Only people belonging to a certain “family” — political party — can get elected from these districts. This restriction of political competition has echoes of Venice! So will the United States become a pretty museum? Probably not. But it may lose its economic superiority by ignoring inclusive founding principles.
Looking at our current economic catastrophe one might wonder why none of the theoretical safeguards of neoclassical capitalism lead to a self correction. Leftists would argue – what safeguards of neoclassical capitalism? Rightists (I hate the moniker “conservative” — what are they conserving? certainly not energy!) claim that it was precisely the lack of capitalism — too much government regulation — that negated any hope that the safeguards of neoclassical capitalism would work. Fair enough. But my question is the following: If untramelled free markets are so wonderful then why don’t they develop organically and then persist as permanent institutions? Why do we have societies like Somalia? It is not enough for economists to claim that there are institutional differences between societies. They still have to explain WHY these differences develop and then why they persist. This is what this blog will investigate.