Why Nations Fail introduces a blindingly simple and highly fertile economic theory: that societies can be divided into those that are inclusive and those that are extractive. The authors apply this idea mostly to developing nations, explaining why some countries become rich and others remain in poverty despite possessing resources that might lead to wealth.
In inclusive societies there is no totalitarian power base; no one group has a stranglehold on wealth and innovation; there is the rule of law that protects commercial enterprise and innovation against expropriation and restrictive practices.
In extractive societies, a monopolistic group stifles commercial and technical development and retains all of the country’s wealth for a few cronies. There is no recourse to law because it only operates in favour of the ruling group. There are many case examples. Before the Civil War the American South was desperately backward because the economy was run to suit the slave-owning ruling class. There was no industry, hardly any railway lines. This was a recipe for stagnation. Acemoglu and Robinson cite the case of Sierra Leone, in which a railway originally built by the British was torn up by the ruler (who had originally been democratically elected) because it would threaten the trading monopoly of his friends.
But the sting in the tail of Acemoglu’s thesis, as I pointed out in my review, is the Britain is the textbook model of inclusive society. Or used to be. The current economic model of “maximizing shareholder value”, private equity, hedge funds, huge tax avoidance schemes, very low investment in research and development, escalating inequality (exclusiveness), are all prime extractive traits. Britain is throwing away centuries of inclusive enterprise and making the transition to an extractive economy. This is catastrophic because once such as system is in place – see Zimbabwe or Russia or Egypt or countless more – it is hard to ever escape it. How is it that the virtues of inclusiveness are being forgotten and that it has required an American and a Turkish-Armenian-American economist to point it out? No argument in the world deserves to be better heard and understood than this.