Rich/Poor Nations

RICH NATION, POOR NATION: WHY SOME NATIONS PROSPER WHILE OTHERS FAIL, BY ROBERT GENETSKI

About Robert Genetski

Robert Genetski is a Republican politician from the US state of Michigan. He is currently the Allegan County Clerk and Register of Deeds. In his capacity has Clerk, Genetski has focused on increasing support services to veterans. He is a former member of the Michigan House of Representatives, representing the 88th District which covers Allegan County, including the cities of Holland, Allegan, Douglas, Fennville, Plainwell, Saugatuck, South Haven, and Wayland. Prior to his first term as a State Representative, Genetski was a school teacher for a decade. He spent time teaching at Orion  Alternative School, which caters to at-risk students.

ABSTRACT

Rich Nation, Poor Nation is intended for anyone who cares about people and their country. Economic policies are powerful. They can impoverish people or help them to create enormous wealth. This book sifts through the evidence from forty countries—large and small, rich and poor. The analysis shows people throughout the world are remarkably similar in how they respond to alternative economic policies. Regardless of culture or location, people respond to policies promoting economic freedom in the most creative and productive ways imaginable. Freedom allows individuals to unleash their creative potential and maximize their God-given talents. It is by unleashing this creative potential that we discover the true force for enhancing the wealth of individuals and, in turn, the wealth of nations.

Book Summary

Rich Nation, Poor Nation, subtitled Why Some Nations Prosper While Others Fail, is a compelling work on the positive aspects of Free Market Economics. The author, Robert Genetski, takes the basic wealth of nations as his baseline and demonstrates through statistical evidence and cogent argument how economic freedom, as envisaged by the founding fathers of the USA and luminaries such as Adam Smith and Milton Friedman, is the principal method to promote wealth and maintain a sound national economy. The book provides detailed information analysing periods of Free Market policies (which the author refers to as Classical Principles) followed by governments in the USA and around the world, and periods of more Socialist leaning policies involving high taxation and burdensome government control (referred to as Progressive Policies), to demonstrate the ebb and flow of national wealth resulting from those exact policies. It was a surprise to learn that during periods of Progressive Policies adopted by various governments in the USA and around the world, national wealth fell and workers' wages remained stagnant or were reduced. It was only during periods of minimal government control, low taxation, and free open markets that both the nation and the average worker improved their basic wealth. The book also includes extensive analysis and statistics, together with data and appendices, to support the author’s arguments and conclusions.

Let me say straight away that I am not an economist, and after the recent global banking crisis and the machinations of the oil and energy markets, I was inclined to take a jaundiced view of a book expounding the benefits of free market economics. However, the analysis carried out by Robert Genetski presents an argument which is difficult to counter. Taking evidence from the performances of countries all around the world, including Russia, Japan and a good number of European, African and South American countries during periods of both Classic and Progressive government policies, the evidence becomes almost incontrovertible. I did not expect to enjoy this book, let alone start to agree with the principles put forward, but Rich Nation, Poor Nation has certainly caused me to reexamine my views. I congratulate Mr Genetski on producing a clear, thought-provoking narrative covering a complex subject, but which can be easily followed by the layman. An excellent, scholarly work and I do not hesitate to recommend it.

Have you ever wondered what makes a nation prosperous — and, in particular, what makes America so wealthy? Dr. Robert Genetski breaks down our nation’s economic history and compares it to the rest of the world in Rich Nation/Poor Nation.

The crux of Genetski’s argument rests in the idea that policies restricting or allowing for economic freedom have been the primary factor in whether or not a nation is prosperous. He places his book in the canon of Milton Friedman and Adam Smith — that is to say, on the side of capitalism and free enterprise.

Before Genetski goes into his case-by-case analyses, he defines wealth both for the benefit of readers and to help establish his broader case for economic freedom. Right in the 2nd chapter, Genetski defines wealth as “the value of goods and services originally created to meet the demands of others.” This impersonal definition serves as the bedrock of the rest of his arguments, focusing on the wider economy rather than on personal wealth. Furthermore, this big-picture view of wealth serves as a way to focus on large-scale social programs and state attitudes towards enterprise rather than being bogged down in the various ways individuals obtain and use their money.

Chapter 3 is spent explaining how wealth is created, and Genetski takes care to explain that technology or government intervention are not, contrary to popular belief, the main causes of wealth creation. Genetski clearly points out the central flaw of government intervention — that the private sector is the sole original source of all wealth, from business owners who provide goods and services to workers that earn money and pour it back into the economy at large. Conversely, Genetski points out that state monopolies on businesses lack the profit motives necessary to stay efficient, buoyed by the state’s power over taxation and protected from the failure that would await a badly-run private business. These two points make clear that freedom from the state is necessary to produce wealth — freedom from those inefficiencies and freedom from having created wealth taken away to fund state programs.

The rest of the book is spent comparing the titular rich and poor nations, mainly focusing on America’s modern economic history. Genetski sets America apart as a nation founded on principles of economic freedom, and uses that distinction to point out that our periods of government intervention directly caused resulting periods of poverty and economic decay.

The argument for freedom is cemented, however, not by the chapters on America but by the chapters on the wider world. Singapore and Hong Kong are great examples of how free enterprise can make resource-poor city-states into global hubs of capitalism. The chapter on Russia is also particularly illuminating, as the total failure of central planning in the USSR is laid bare, showing just how capitalism won the Cold War.

Although the book is full of economic theory, it is also highly accessible to readers of any stripe, worded clearly and concisely. Combined with the data Genetski provides to prove his arguments, Rich Nation/Poor Nation sets out a case for economic freedom that anyone can understand.

 

REVIEW 1

I downloaded this book to see if it would help my understanding of why a Universal Basic Income might be a good thing. This book did not help in that respect but did seem to be well written and researched. Here are the highlights I took:

“The objective of this book is to provide systematic, historical evidence of the extent to which policies promoting or impeding economic freedom have been associated with the rise and fall of the wealth of nations.

“The most significant finding from this analysis is that no growth in wages occurred during those periods when economic polices moved in the direction of the progressive agenda. Almost all gains in workers’ wages since 1900 occurred during years when US policies embraced free-market classical principles. This finding explains how the disappointing performance of wages from 2004-2015 is not unusual. It is typical of every historical period when economic policies have enhanced the power and control of government at the expense of individual economic freedom.

“Chapter 16 describes policies in the two most extreme real world examples of countries following free-market classical principles—Singapore and Hong Kong. Although neither country is blessed with natural resources, each has progressed from being among the poorest nations in the world to being among the world’s wealthiest countries.

“Freedom places individuals in charge of and responsible for their own accomplishments. Given freedom, individuals respond by unleashing their creative potential and maximizing their God-given talents. It is in unleashing this creative potential that we find the true force behind enhancing the wealth of nations.”

REVIEW 2

Rich Nation / Poor Nation, subtitled - Why Some Nations Prosper While Others Fail is a compelling work on the positive aspects of Free Market Economics. The author, Robert Genetski, takes the basic wealth of nations as his baseline and demonstrates through statistical evidence and cogent argument how economic freedom, as envisaged by the founding fathers of the USA and luminaries such as Adam Smith and Milton Friedman, is the principal method to promote wealth and maintain a sound national economy. The book provides detailed information analysing periods of Free Market policies (which the author refers to as Classical Principles) followed by governments in the USA and around the world, and periods of more Socialist leaning policies involving high taxation and burdensome government control (referred to as Progressive Policies), to demonstrate the ebb and flow of national wealth resulting from those exact policies. It was a surprise to learn that during periods of Progressive Policies adopted by various governments in the USA and around the world, national wealth fell and worker’s wages remained stagnant or were reduced. It was only during periods of minimal government control, low taxation and free open markets that both the nation and the average worker improved their basic wealth. The book also includes extensive analysis and statistics together with data and appendices to support the author’s arguments and conclusions.

Let me say straight away that I am not an economist, and after the recent global banking crisis and the machinations of the oil and energy markets, I was inclined to take a jaundiced view of a book expounding the benefits of free market economics. However, the analysis carried out by Robert Genetski presents an argument which is difficult to counter. Taking evidence from the performances of countries all around the world including Russia, Japan and a good number of European, African and South American countries during periods of both Classic and Progressive government policies, the evidence becomes almost incontrovertible. I did not expect to enjoy this book, let alone start to agree with the principles put forward but Rich Nation / Poor Nation has certainly caused me to re-examine my views. I congratulate Mr Genetski on producing a clear, thought-provoking narrative covering a complex subject but which can be easily followed by the layman. An excellent, scholarly work and I do not hesitate to recommend it.

REVIEW 3

Robert Genetski proves once again that sound economic theory and reliable data can be joined to answer the biggest questions facing humanity. In Rich Nation/Poor Nation, he eloquently explains classical liberal principles and tests them using real-world data on economic growth in countries around the world. The free-market model of low taxes, deregulation, and the rule of law is shown to work again and again over time and in virtually all countries of the world. Don’t let the brevity of Genetski’s book fool you: he swiftly demolishes the arguments put forth by more prolix authors such as Thomas Piketty using plain English and easy-to-understand graphs.

This book is an instant classic and belongs in every library and on the desk of everyone with an interest in human prosperity.—Joseph Bast, President, Heartland Institute. Dr. Genetski has done all students of economics as well as the American citizen a true service. He has put together a book dealing with the most important topics in economics. Rich Nation/Poor Nation makes economics come alive with evidence, graphics and examples showing how free-market, limited government policies promote prosperity.—Dave Brat, US Congressman, former Economics Professor

In An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith addressed the anomaly that only a few nations were wealthy, and explained why Great Britain, which was making the transition from mercantilism to capitalism, had broken free of abject poverty. Bob Genetski has taken a page out of Adam Smith’s play-book with a well-written, easily digested, and expertly-argued presentation of why today a number of nations have become wealthy and why a number of nations are still mired in poverty. It is a guide for policy makers who seek to maintain the wealth their country enjoys or who seek to attain the prosperity of those countries who follow free market principles.--Gary Wolfram, William Simon, Professor of Economics and Public Policy Director of Economics, Hillsdale College.

REVIEW 4

A defense of economic freedom as the linchpin of wealth creation. Debates about economics and politics necessarily address the nature of inequality and distributive justice. To that end, Genetski (Classical Economic Principals & the Wealth of Nations, 2011, etc.), inspired by famed economists Adam Smith and Milton Friedman, argues that individual freedom is both morally and economically defensible, as it’s the most effective tonic to chronic poverty. First, the author defines wealth (“the value of those goods and services originally created to meet the demands of others”), plumbs the mechanics of its generation, and discusses the real difficulties of comparing the wealth of heterogeneous nations. He asserts that the most reliable way to comparatively measure wealth is by output per person; China is the world’s largest economy, but by this standard, it barely registers as a middle-class nation. A considerable portion of the book focuses on the United States, and according to Genetski, its wages and wealth creation have generally coincided with fidelity to free market principles. The author also provides a brief analysis of the world’s major economic regions, including Asia, Europe, Latin America, and Africa. Repeatedly, he discovers a causal relation between robust market liberalization and wealth generation, and he powerfully contends that involuntary wealth redistributions ultimately perpetuate poverty by dramatically reducing future output. Genetski’s analysis is remarkably concise, and the ground that he covers in fewer than 150 pages is impressive. Of course, that same concision demands the elision of significant detail; all of modern Latin America, for instance, is summed up in just a few pages. The book is unfailingly rigorous, providing hard data to substantiate its chief claims, but the philosophical argument undergirding the entire study—that people of all cultures ultimately desire freedom and generally respond predictably to the same economic policies—requires far more defense than the author gives here. Nonetheless, this is a sober and provocative contribution to the debate regarding the role of governments in regulating economic activity. A short but thorough primer on modern political economy.

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THE WEALTH AND POVERTY OF NATIONS, BY DAVID S. LANDES

Book Summary by Allen Cheng

ABSTRACT:

David S. Landes has written an extraordinary economic history that will open your eyes about countries’ economic flops and good fortune. He also covers what makes a country achieve - and keep - great economic success. The book will appeal not only to economic history buffs, but also to the average person who needs to know how to keep a company or a country from economic trouble. Not to mention, he offers lots of great cocktail party anecdotes to impress your friends. Landes builds on solid economic data, but his unusual factual nuggets and vivid commentary are what make the book such a pleasure to read. In an age where politicians seek to make sure America stays economically relevant amid huge trade friction, this book is a must-read for not just the chief executive officer, but for the rank-and-file workers who want to make sure they will be winners, not losers, in international trade. Landes has cooked up a great feast of economic history. Come, draw up a chair to the table and partake of this rich bounty.

About the Author

David S. Landes is professor emeritus at Harvard University. His previous books include Bankers and Pashas, The Unbound Prometheus and Revolution in Time.

BOOK SUMMARY

History has shown us that societies that are the most successful at building businesses and economies have been those who were able to follow technological advances. Those societies became more modern, as seen in these pivotal historic events.

A Case in Point: In 1836, Nathan Rothschild, a wealthy businessman who lived in Europe during the Industrial Revolution, died of an infection that was not curable by his era's best doctors. Medicine has advanced greatly since then. In general, people live longer due to better sanitation and medicine. Back in the mid-1800s when Rothschild died, it was easy for anyone to get sick from gastrointestinal infections because toilets were unsanitary and underwear wasn't washable or changeable; hand-washing wasn't common practice either. Jews and Muslims had healthier lives because their religious beliefs required them to wash frequently. The Industrial Revolution changed all this with its technological advances such as cheap cotton clothing and mass-produced soap which made hygiene easier for everyone.

Better Nutrition, Healthier People

As food production improved, people were able to get more and better nutrition. This led to fewer deaths from disease, which is caused by poor nutrition. It also helped reduce famines because it allowed for more reliable and quicker transport of food supplies. In addition, better supply meant a greater variety of foods could be eaten, even during wartime when certain countries are unable to grow enough crops to feed their populations. These improvements can be seen in the height and weight gains among immigrants who move from poorer countries where they have less access to good food sources into richer ones with universal healthcare systems that allow them better access to nutritious foods.

The distribution of medical and scientific knowledge is not even. There are many poor countries that have less access to this information, but the gap between them and rich countries is closing. The East-West division isn't as relevant anymore because now it's more about North-South or West vs Rest. Wealth gaps are growing in some places with Switzerland having a ratio of 400:1 compared to Mozambique which has a much smaller income per person. Rich countries should help poorer ones without being accused of Eurocentrism (being biased towards Europe).

Climate Extremes

Science has allowed us to live in places that are warmer and colder than where we would naturally be. Scientists must endure extreme conditions when they work, while the rest of us avoid them as much as possible. Extreme heat is more uncomfortable than cold weather. We have developed coping mechanisms for hot weather such as siestas, but air conditioning was only invented after World War II. Weather can create illnesses, so it's important to prevent illness instead of curing it if you want to save money or time on medicine. The germ theory was an advancement in disease prevention because governments could now focus on preventing people from getting sick instead of focusing on curing them once they were ill.

Water resources can help draw people to a region or keep them there. The great rivers, such as the Nile and Indus, drew settlement because they deposited fertile soil in their deltas, which encouraged agriculture and nearby communities. Moderate climates give people more energy than extreme ones do. Western Europe has moderate winters and year-round rainfall, an unusual combination that provides reliable water for farming and living comfort. Because of the thick forests in Europe, horses had to be bred to forage for food, which resulted in larger horses. However, smaller Mongolian and Arabian horses that were able to withstand harsh climates gave the East Asian people an advantage over Europeans. European waste was used as fertilizer while Chinese human waste spread parasites and worms. Even so, rich soil from the Nile River Delta area could not compete with China's fertile land. European agricultural techniques couldn't beat China's natural advantages either because it relied on its population rather than slavery and grew by dint of its booming population growth due to early marriage without financial limitations.

Property Rights

Ancient Greece was a democracy that influenced European society. It had more influence than Oriental despotism, where the ruler owned everything and could take property at will. People won't develop property if they can lose it for no reason, so that didn't happen in such societies. Chinese rulers spied on their people and never trusted them to do anything good or moral.

In Europe, there were certain rules that people followed to protect their property and rights. The ideas of private ownership started in ancient Greece and Rome, but they became more important when Christianity came along. City-states developed as a result of these laws, which gave citizens power over their own affairs. Chinese rulers took a different approach; they would move large groups of people around whenever it seemed necessary to improve the economy or help society at large.

Rulers vs. Religion

In western Europe, the separation of church and state allowed for intellectual freedom. In Islamic societies, religion held power over all other aspects of life. The Chinese government was based on meritocracy instead of a monarchy or democracy; therefore it had no tolerance for religious dissenters. The medieval economic revolution in Europe benefited from agricultural and food supply innovations. Some of these included the wheeled plow, "stall-fed oxen," strong dray horses and a crop rotation system.

In towns, corporate guilds strictly ruled what craftsmen could do and when. However, such rules could be outfoxed by outsiders who moved into the suburbs beyond the rules. Too-busy craftsmen from the towns even outsourced their extra work to suburban workers so they wouldn't have to waste time on it themselves. Urban rules ended outside cities which meant that even women and children could do this work in rural cottages starting from around 1300 A.D. In Italy and The Low Countries town guildsmen eventually got angry about this outsourcing practice because it was cutting into their profits as well as hurting their business reputation with customers who wanted high quality goods made by highly skilled craftsman within town walls only. But in England people continued outsourcing for centuries until by 1550 half of all wool cloth was being produced in village homes like this one here. Thus innovation bubbled up from below which is also called diffusion through example (or trial & error).

Critical Inventions: European Turning Points

Middle Ages Europe saw many inventions and improvements. The Romans' water wheel fell into disuse, but it was revived in the tenth and eleventh centuries. Water power helped produce woolen clothing, make paper and crush grains, metals and beer hops. Glasses helped transform the way people worked in medieval times. They were invented because older workers had eye problems that made it hard for them to do their work, but glasses solved those problems and allowed them to continue working into old age. This made it possible for craftsmen to make more detailed products since they could see better than before. Meanwhile, Muslims had an instrument called a "astrolabe" which was similar to a sextant, but they didn't go further with making precise instruments like Europeans did. Other civilizations also worked on small items by hand, but since each item was different from the next one there wasn't any standardization of production methods or quality control over what they produced. Europe took things further by creating standardized production methods based on massproduction techniques that required less skill from individual craftsmen while still producing high quality goods at low costs as opposed to having skilled artisans produce unique items one at a time using traditional craftsmanship methods."

Europe also benefited from the mechanical clock, which replaced sundials and water clocks. People used time to organize their lives in crowded cities. Clocks helped them manage their schedules and ration space. Meanwhile, the Chinese had water clocks but treated time as a private matter that only high ranking officials could use. Muslims liked European clocks but didn't make time a public matter except for prayer calls.

 

The Chinese invented printing, but it was widely used only by the government and high officials. They feared dissent, so they did not disseminate knowledge to most people. Printing spread throughout Europe in the 14th century with Germany's Gutenberg Bible. Muslim countries opposed printing because their leaders didn't want a printed Koran. The Chinese invented gunpowder in the 11th century, but Europeans learned of it around the late 13th or early 14th centuries. European technology improved when they switched from powder to pellets of gunpowder, which allowed for better ignition and bigger explosions. Europe's bell foundry experience helped them create superior cannons that led to their military dominance.

In the fourteenth century, Europe began to lag behind other societies. The Islamic world surpassed European understanding from 750 to 1100, but then religious zealots criticized science and progress stalled. China might have progressed further than Europe did had it not been for a lack of secure property rights and tight state control, as well as a quasi-confinement of women to the home.

Lessons to Learn

International trade often has a negative impact on workers and the environment. It's important to be flexible, responsive to market signals, and moral when doing business. Technology can help some people but hurt others; foreign aid is not always effective in helping poorer nations. Nations need work ethic, thriftiness, honesty, patience, and tenacity to survive economically.

REVIEW 1 BY READER A

Read this book in one stint during a stay at the sea. It appealed to me on a very fundamental, nerdy level as it went deep into historic details, uprooting information that was new to me. The reader spends equal time in the main text as in the footnotes - while being challenged and entertained. 'Guns, Germs and Steel' by Jared Diamond tries to explain history by looking at environmental factors and resulting positive feedback loops. Landes agrees basically that environmental factors contribute, but places at least equal value on factors like Weber's 'Protestant Work Ethic'. Don't be mislead by the 'Protestant' bit, Landes sees the influence of organized religion on science and politics as a major hindering factor in the development of civilization.

Be honest, study hard, work hard. Societies build upon this principles perform better than quasi-feudal ones. Hard work must pay off, dishonesty must be punished. Landes' theory resonates with me, which is an emotional factor and completely unscientific. So maybe I just felt good that someone reinforced my personal take on the world. Still, I have travelled quite a bit through areas mentioned by him and experienced the exact cultural differences. Try to do work in Mexico and then in South Korea. Take a walk through slums in Beijing and then Sao Paulo (actually forget doing it in Sao Paulo, you will die).

David Landes is trying to answer a similar question to that posed by Jared Diamond: Why are some countries so rich and other countries so poor? Landes comes to a much more complex answer than Diamond, and because of that I find his explanations somewhat more plausible. Landes concludes that prosperity is the result of a complicated interplay between culture, policital institutions, and geography. Even if you disagree with any of his final explanations, I can promise that you will learn a great deal by reading this fascinating book.

REVIEW 2 BY READER B

Despite the title, this isn't a book about why, say Botswana is doing so much better than Zimbabwe these days due to such and such a policy or Germany versus Greece or practical advice on how the poor countries can turn things around and the rich countries help them. It's more descriptive than prescriptive. Rather it's a world economic history that deals with forces centuries, even millennium old. I appreciated that Landes wasn't afraid to be controversial; he takes dead aim at all forms of political correctness, multiculturalist cant, and such theories as those found in Said's Orientalism. Looking at other reviews, some complain Landes is too Eurocentric. Given the theme of the book, the wealth and poverty of nations, I can't blame him much. It's like that old joke about robbing banks--you go where the money is. Mind you, he seems to me to be not just Eurocentric but Anglocentric--although again, it does tie into his theory given Britain was arguably ground zero for the Industrial Revolution. And that is definitely at the center of his answer to the question posed in his subtitle concerning nations: why some are so rich and some so poor.

REVIEW 3 BY READER C

The book did leave me with questions. Landes begins with an analysis of geography. On the North/South axis, Landes believes the difference between tropical and temperate regions are crucial. But if that's so, why didn't North America develop a technologically sophisticated culture before contact with the West? Why then would the most impressive indigenous civilizations in the Americas rise out of jungles, such as the Mayans and the Incas? It's not a question asked in the book, which doesn't deal with the Americas until the era of exploration and colonization. Though to give Landes his due, Eurocentric doesn't mean triumphalist or apologist. If for whatever reason, you're ignorant of the atrocities committed by Europeans in the Americas or of the savagery of the Atlantic Slave Trade, Landes will certainly provide an education. (Especially when it comes to the Spanish Conquistadors. Landes is not kind to Catholicism or Islam, which he sees as stultifying upholders of dogma.) When Landes comes to examine the East/West axis, he sees as crucial the differences in property rights and development of markets. I'd be the last person to dismiss such factors out of hand, yet Landes' thesis as to the definitive factor that gave rise to the differences did raise both eyebrows:

Europe's great good fortune lay in the fall of Rome and the weakness and division that ensued. (So much for the lamentations of generations of classicists and Latin teachers.) The Roman dream of unity, authority, and order (the pax Romana) remained, indeed has persisted to the present.... [yet] fragmentation was the strongest brake on wilful, oppressive behavior. Political rivalry and the right of exit made all the difference.

Really? Because I do find it hard to believe the fall of Rome wasn't a tragedy for the West. Ancient Rome at its height is estimated to have had a population of one million. After its fall, no city, in Europe at least, would hit that threshold until London in 1811. Trade, literacy, urbanization all collapsed in the former Western Empire and arguably wouldn't fully recover for nearly a millennium. I do get Landes' point that authoritarian empires could do much to cripple technological and economic progress, but that still seemed a rather breathtaking claim. It is key to his theory however. Because if for Landes the key to the wealth of nations is the Industrial Revolution, the key to the Industrial Revolution is a culture of scientific inquiry and invention spurred on by a rivalry between nations, allowed room to breathe by a fragmented authority and fostered by a strong work ethic. (He sees this fragmented authority and work ethic as crucial in the rise of an industrial Japan as well.) In the end, geography isn't destiny, for according to Landes it's "not resources" that made the difference between nations but what "lay inside--culture, values, initiative." (And a constant related thread--the importance to growth and development of the "status and role of women" and the rights of minorities--Jews in history often being the canary in the coal mine.)

This work is erudite, entertaining, thought-provoking and written with style. (The kind of book that stretches vocabularies so have a dictionary handy.) The author is apparently an American, but he has a dry, at times acid, often deadpan humor I associate with the British. It's also hard not to respect a book that garners praise, as seen in the blurbs, from such celebrated yet ideologically diverse economists as John Kenneth Galbraith and Robert Solow. Landes himself, for all that he stresses the importance of property rights, is far from free market--he made frequent stabs, if not arguments, at free traders. I saw one reviewer that claimed this book was taught as an example of flawed historiography. Maybe so, but it's not evident to me. I appreciated that Landes often related the various controversies in the field, and there are extensive notes and bibliography. It seemed sound and told a great story. So many of the connections Landes made are fascinating; the breath of the technological and social details he presented and global scope he took in was impressive. It's a book well worth reading and thinking about.

 

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WHY NATIONS FAIL: THE ORIGINS OF POWER, PROSPERITY, AND POVERTY

by Daron Acemoğlu, James A. Robinson

ABOUT THE AUTHORS

Daron Acemoglu is a Turkish-born American economist and professor of economics at the Massachusetts Institute of Technology for the past two and a half decades. After completing his Ph.D. at the London School of Economics in 1992, Acemoglu embarked on a very successful career which made him one of the most recognizable economists of the 21st century. In fact, a 2011 survey of American economists ranked him the third most favorite living economist under the age of 60 (just behind Paul Krugman and Greg Mankiw), and a 2015 study named him the most cited economist of the past decade.

James A. Robinson is a British economist and political scientist with a Ph.D. from Yale University; he has worked as a professor of economics at numerous prestigious institutions, currently at the Harris School of Public Policy, University of Chicago. A close collaborator of Acemoglu, Robinson is mostly interested in comparative political and economic development of countries in Sub-Saharan Africa and Latin America. He has written quite a few books and studies, many of them collaborations.

Acemoglu and Robinson have written two books together: Economic Origins of Dictatorship and Democracy and Why Nations Fail.

ABSTRACT

Brilliant and engagingly written, Why Nations Fail answers the question that has stumped the experts for centuries: Why are some nations rich and others poor, divided by wealth and poverty, health and sickness, food and famine? Is it culture, the weather, geography? Perhaps ignorance of what the right policies are? Simply, no. None of these factors is either definitive or destiny. Otherwise, how to explain why Botswana has become one of the fastest growing countries in the world, while other African nations, such as Zimbabwe, the Congo, and Sierra Leone, are mired in poverty and violence?

Daron Acemoglu and James Robinson conclusively show that it is man-made political and economic institutions that underlie economic success (or lack of it). Korea, to take just one of their fascinating examples, is a remarkably homogeneous nation, yet the people of North Korea are among the poorest on earth while their brothers and sisters in South Korea are among the richest. The south forged a society that created incentives, rewarded innovation, and allowed everyone to participate in economic opportunities. The economic success thus spurred was sustained because the government became accountable and responsive to citizens and the great mass of people. Sadly, the people of the north have endured decades of famine, political repression, and very different economic institutions—with no end in sight. The differences between the Koreas is due to the politics that created these completely different institutional trajectories.

Based on fifteen years of original research Acemoglu and Robinson marshall extraordinary historical evidence from the Roman Empire, the Mayan city-states, medieval Venice, the Soviet Union, Latin America, England, Europe, the United States, and Africa to build a new theory of political economy with great relevance for the big questions of today, including:

 - China has built an authoritarian growth machine. Will it continue to grow at such high speed and overwhelm the West?

 - Are America’s best days behind it? Are we moving from a virtuous circle in which efforts by elites to aggrandize power are resisted to a vicious one that enriches and empowers a small minority?

 - What is the most effective way to help move billions of people from the rut of poverty to prosperity?

More philanthropy from the wealthy nations of the West? Or learning the hard-won lessons of Acemoglu and Robinson’s breakthrough ideas on the interplay between inclusive political and economic institutions? Why Nations Fail will change the way you look at—and understand—the world.

 

BOOK PREMISE

Some countries are rich, and others are poor. Why? Daron Acemoglu and James A. Robinson try to give a definite answer to these questions in their ultra-popular and heavily discussed book: Why Nations Fail. Who Should Read “Why Nations Fail”? And Why? Why Nations Fail, writes Jared Diamond, “should be required reading for politicians and anyone concerned with economic development.” It should also be required reading for those who want to understand why some nations are rich and others poor, as well as those who want to put an end to inequality and corruption.

WHY NATIONS FAIL: BOOK SUMMARY

In Why Nations Fail, Daron Acemoglu and James A. Robinson set before themselves a very ambitious task: to pinpoint, once and for all, the real reasons why some countries are rich and prosperous, and why others are poor and doomed to fail all over again. And in fifteen chapters, they lay out a thought-provoking theory which, if not something more, has incited a lively discussion among the most famous economists, intellectuals, and political thinkers of the XXI century.

Let’s see what all the fuss is about.

The Existing Explanations

It isn’t difficult to guess that Why Nations Fail isn’t the first book to try to get to the bottom of the “rich vs. poor countries” quandary. And it is even easier to suppose that before presenting their theory, Acemoglu and Robinson try to point to the faults of other people’s explanations of the problem. They group them into several categories, which we’ll further group into three.

Geography and Climate

According to the geography hypothesis most eloquently demonstrated by Jared Diamond in Guns, Germs, and Steel, some nations were merely lucky enough to form countries on locations blessed with a pleasant climate. There’s a reason why the poorest countries in the world are located in tropical regions, and why the wealthiest can be found in cooler climatic zones. Simply put, diseases are more likely to develop in the tropical zones of central Africa and America, and, thus, it is only natural to expect from a Zambian to be far less productive than a Norwegian.

However, ask Acemoglu and Robinson, then why are neighboring countries such as North Korea and South Korea so different? Moreover, why is Singapore so prosperous, even though it is located in the tropical climate zone.

Culture and Religion

According to the culture hypothesis, some people are simply more inclined to work than others, because of their cultural and religious heritage. Most of the developed countries, for example, went through the Protestant Reformation. And, as any Protestant knows, work is a religious duty, and everyone should embrace it; so, it’s only natural to expect that a country with a Protestant past should be far more prosperous than one with, say Confucian values.

Because the latter thinks that humanity, loyalty, and honesty is much more important than work and success; and, because economics is, well, to quote Thomas Carlyle once again, a dismal science. However, this once again fails to explain why North Korea is one of the poorest countries in the world, and South Korea one of the most developed ones.

Ignorance

According to the final group of explanations, the ignorance hypothesis, North Korea is less developed than South Korea because of the ignorance of the ruling elites. In other words, the people who ruled North Korea were incompetent, and instead of solving problems, they merely created more; on the contrary, those who ruled South Korea understood the root of the problems and tried to solve them. This does explain some things, but it doesn’t do well in the case of others.

A few case studies provided by Acemoglu and Robinson – such as, for example, Ghana – show that it is not the ignorance of political leaders which causes the economic decline of countries, but it is, on the contrary, their very shrewd understanding that this decline also leads to their personal economic evolution.

And that’s basically the main point of Acemoglu and Robinson’s study. Rich countries are founded around inclusive and uncorrupted economic and political institutions; poor countries, on the other hand, suffer because of extractive institutions. Let’s analyze both of them in detail.

Inclusive Institutions

In essence, inclusive – or integrative – institutions are those which allow large groups of people to have a say in political and economic decision-making. Inclusive institutions give individual members of a society access to high-quality education and allow them to freely choose the profession they like. They also incentivize them to be creative and challenge the status quo. And this is especially important because it provides a relatively fair and level playing ground in which the talented know that they can benefit by providing benefit to the other people.

Bill Gates and Jeff Bezos became the wealthiest people in the world because their products made the lives of many people easier; however, Carlos Jesus Slim in Mexico earned his money by exploiting the monopoly in landline telephony. The extractive institutions in Mexico allowed him to prosper and become rich without providing his countrymen additional value; integrative institutions would almost never allow this.

And how do inclusive institutions come about? Well, interestingly enough, in many cases, merely by accident. Consider the example of the Glorious Revolution of 1688 in England; in less than a century, this revolution would lead to the Industrial Revolution which would eventually change the world in ways nothing before ever did, practically marking the beginning of the “rich vs. poor” debate, as argued in A Farewell to Alms. And it all started because of the plague.

The plague, you see, had led to the deaths of so many people, that, the ones who survived had to work the jobs of five and still received the paycheck for one. So, they rebelled, and the attempt to meet their demands eventually led to the establishment of economic institutions which guaranteed the protection of private property and, with it, introduced actual free market policies. The rest is history.

Extractive Institutions

Extractive institutions are – you’ve guessed it – the very opposite of inclusive institutions. Acemoglu and Robinson call them extractive because they believe that the thing which defines these institutions is their inclination to extract wealth from those who are not part of them. So, in countries ruled by extractive institutions, there are always two classes, with the first one (the elite) always in a position to repress the latter one. The only way for those who are not in power to prosper in a country governed by extractive institutions is to join the vicious circle, i.e., to become part of the elite and prevent others from doing it.

Extractive institutions disincentivize people from taking part in the political and economic processes of a country; the reason for this is simple: they want to keep the status quo. Now, don’t get Acemoglu and Robinson wrong: they firmly believe that in addition to inclusive institutions, centralized political power is a must if you want to create a wealthy and prosperous country. However, there’s a limit to how centralized it should be since the economic processes are too complicated for one to be able to predict the results.

For example, in the time of Stalin, the centrally planned economy of the USSR decided to reward workers with bonuses as high as a third of their paycheck for exceeding the assigned quotas. This did the trick for a while, and USSR became the second largest economy of the world; however, in retrospect, it also disincentivized these workers to think outside the box, which prevented the process of creative destruction (Schumpeter).

But, then again, extractive institutions fear innovation and creative destruction, since these forces usually lead to them losing their power. So, they stifle them, and thus, cause the failure of their countries.

The Curious Case of China

Now, Acemoglu and Robinson are capable of explaining many things through their framework, but, even at first glance, China is a curious case. Even though it is still an authoritarian country, China’s economy is growing at such a rapid pace that many have started wondering if we’re living the last years of American dominance. So how did China succeed to become the second largest economy of the world even though still a communist country ruled by extractive institutions?

Well, according to Acemoglu and Robinson, the main reasons for this are the inclusive policies advocated by Deng Xiaoping, whose economic reforms opened China’s economy to the world and, in addition, they reoriented it internally towards market-based economic programs. However – and this is the more exciting part of Acemoglu and Robinson’s analysis – their model predicts that, unless China furthers the inclusiveness of its institutions, its growth will steeply drop over the next decade.

What we may be seeing is just another case of the 1970s Soviet Union. Back then, the relocation of labor from the agricultural sector to the manufacturing industry worked wonders, but twenty years later, the USSR collapsed. Something similar may happen to China as well unless the country improves its political and economic inclusiveness. Now, that’s a bold prediction.

Key Lessons from “Why Nations Fail”

1.      The More Inclusive the Institutions, the Richer the Country

2.      Democracy Evolves Because of the Threat of Revolutions

3.      Foreign Aid Is Sometimes the Opposite

4.      The More Inclusive the Institutions, the Richer the Country

The central thesis of Acemoglu and Robinson’s Why Nations Fail is that economic prosperity depends on the inclusiveness of the political and economic institutions of a country. In other words, the more people make political and economic decisions, the better off a country is supposed to be. Inclusive institutions flourish because they change. And they change because they allow people to freely choose their professions and the market to guide the country on a prosperous path through its invisible hand.

Extractive regimes, in contrast, are more interested in keeping the status quo, since it is the status quo which allows them to remain in power. However, the status quo means no innovation or creative destruction, and this is the main reason why some nations have never – and may never – attain wealth. One more thing, though: a powerful, centralized government is always essential, because, as the case of Somalia shows, without it, neither the free market nor anything else really works.

Libertarians would, of course, beg to differ. Democracy Evolves Because of the Threat of Revolutions. According to Acemoglu and Robinson, the history of democracy is the history of revolutions prevented. They think that all societies must begin as non-democratic regimes in which elites rule through extractive governments. However, at some point, the ruled realize, to quote Marx, that they have nothing to lose but their chains, and this is when they start pondering whether revolution is the optimal escape from their doom.

Since a revolution would cost them all of their benefits, the rich act so that they lose only some of them. Namely, they propose smaller taxation rates and appropriate measures which don’t necessarily lead to revolution; in turn, this causes redistribution which helps some of the ruled ones move vertically upward. And this works until it doesn’t anymore – when the process restarts. Thus, democratization happens when the rich try to avoid revolution by willingly increasing monetary redistribution and making some of the poor richer.

In time, this leads to the inclusion of many, and to the transformation of extractive institutions to inclusive ones: Inclusive economic and political institutions do not emerge by themselves. They are often the outcome of significant conflict between elites resisting economic growth and political change and those wishing to limit the economic and political power of existing elites.

Foreign Aid Is Sometimes the Opposite

Interestingly enough, the analysis above implicitly suggests that foreign aid will more often do a disservice to a country rather than helping it. In simpler terms, if a country is ruled by extractive institutions, foreign aid will rarely reach the intended addressees and will be, in fact, used by the elites to corrupt even more people interested in defending the status quo.

An excellent example of this process is Afghanistan, a country which, despite billions of dollars in foreign aid, hasn’t prospered almost two decades after the fall of the Taliban!

 

WHY NATIONS FAIL-- QUOTES

1.       Poor countries are poor because those who have power make choices that create poverty.

2.       Politics is the process by which a society chooses the rules that will govern it.

3.       The most common reason why nations fail today is because they have extractive institutions.

4.       Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.

5.       Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.

 

Review 1

Whether you’re from a wealthy nation, an impoverished one or somewhere in between, you’ve probably asked yourself why your country inhabits its place in the international hierarchy. Culture? Natural resources? Luck? When the Spaniards came to the new world, they sought gold and other riches, but they didn’t plan on mining the precious metals themselves. The trick, they found in places like Peru and Mexico, was to capture the king, take his wealth and then torment him until he begged his people to give in to the Spaniards’ demands. Eventually, the people were organized into a system of forced labor that extracted then transported local resources back to Europe, enriching the Europeans and impoverishing native American peoples. European settlers weren’t able to do this in all regions in the Americas, however. In Jamestown, when it became clear the indigenous people wouldn’t provide the slave labor needed to make the colony economically successful, the Virginia Company was forced to incentivize labor among its colonists, offering them land and a vote in the General Assembly. A semi-democratic system emerged, which eventually led to the inclusive political and economic systems that define the United States today.

It is these pluralistic institutions, economists Daron Acemoğlu and James A. Robinson argue, which are most responsible for world inequality and the economic success and failure of nations. The quality, culture or ancestry of a nation’s people have little influence on its wealth. Acemoğlu and Robinson begin their text with an illustrative example: On the north side of the city of Nogales, they write, residents are educated, most have health care, their property rights are respected, and they enjoy the benefits of law and order. The average income is about $30,000 a year. Residents of the south side of Nogales, on the other hand, make about a third of the annual income of their northern neighbors. Most haven’t graduated from high school and have limited access to health care. Authorities are corrupt, bribes are required to open a business and residents know the gains they acquire through hard work will likely be expropriated.

Despite their economic disparity, the residents of north and south Nogales aren’t terribly different. They share a common culture, common ancestors and, for the most part, a common history. So, Acemoğlu and Robinson ask, why the disparity? The answer is simple: Nogales straddles the border between Mexico and the United States of America, and stark differences exist in the institutions that govern each side of the border. These institutions, Acemoğlu and Robinson argue, are responsible for the inequality that persists between the two communities.

Review 2

Why Nations Fail is both an engaging and thought-provoking read. As we pointed out in the “Who Should Read This Book” section, even Jared Diamond, who has found many faults with its central thesis, endorses it full heartedly. And we share his enthusiasm!

The central thesis of the book may be a bit reductive and constraining, but it is nevertheless one which will be debated for many decades. And what more can you ask from a book?

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 WHY SOME NATIONS ARE RICH AND OTHERS ARE POOR

Why are some countries rich and others poor? And to this question, only history can give us some guidance to the answer because past societies constitute thousands of natural experiments with known outcomes. According to many readings, the answer to the question involves both external and human factors. In Mancur Olson’s essay, “Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor,” he focuses the reader’s attention to the remarkable variations in levels of productivity and income marked out by national boundaries. In fact, we realize that countries with higher income levels richer. When an immigrant from a poor country lands in a rich country, his/her earnings rise by a factor or more. But because the immigrant did not unbelievably obtain either more human capital, or presume radically different cultural or religious values, then the determining factors must lie in the institutional and policy differences between the two countries. In general, many economists believe that people are rational and will grasp opportunities for gains from innovation, allocating efficiencies, and contractual adjustments. However, Olson disagrees. Olson considers neoclassical variables such as technology, capital, the quantity and quality of labor, land and natural resources. And in each of these sections, he mentions that knowledge is widely available at low costs, human capital differences are insufficient, and land/labor ratios and diminishing returns do not appear explanatory. Which then leaves policies and institutions that explains the differences between the rich and the poor countries.

It is commonly said that by improving economic and social conditions a country can reach an appropriate standard of living for all people. In developing the country, the governments of poor countries put their utmost effort in enhancing their domestic conditions. However, some countries still need assistance to develop; they do not have enough natural resources, knowledge and funds to develop independently. Taking a look on the access to productive knowledge, Olson takes the third world countries into consideration as an example. Third world countries, such as South Korea, have been growing very rapidly from the adoption of modern technologies from the first world. According to Olson’s statistics, the costs of intangible technology were minuscule. In fact, the foreign owners of productive knowledge obtained less than a fiftieth of the gains from Korea’s rapid economic growth. In history, statistics have shown that the level of technology has increased more quickly in developing countries and quickest in low-income countries.

Based on what we learn from economics class, good economic governance and investments in human capital are key factors in developing into a rich country. In fact, it has become a primary responsibility for poor countries. Also, many people believe that culture is a significant factor to economic development. Thus, people predict that some countries are poor because they lack cultural traits – not proficient in responding to economic opportunities. “The average level of human capital in the form of occupational skills or education in a society can obviously influence the level of its per capita income.” In order to produce continuous growth, there must be a factor or a combination of factors that can be collected indefinitely without diminishing returns. Olson points out that since life is limited; there is a maximum limit to the amount of human capital that can be accumulated. Therefore, while increasing human capital may be able to lengthen the duration of the transition period in the growth model, human capital accretion cannot be the basis of perpetual growth.

We often make an assumption that overpopulation, low ratio of land and other natural resources to population increases the poverty in the poor countries. A simple model tells us that a continuous incentive for the poor to migrate to the rich countries will reduce the differentiation in incomes. And if the lack of land or overpopulation is crucial, certain countries like Ireland should have experienced rapid growth of per capita income – also resulting in the end of outmigration. But as we see in Olson’s essay, these countries are still experiencing outmigration and its level of per capita income is still lower than those wealthy countries (where everyone migrates to). Essentially, the economic concepts and models of these factors contradict the results happening in the world.

The answer to the differences in rich and poor countries is the quality of the countries institutions and economic policies. Studies today observe that the fastest-growing countries are never the countries with the highest per capita incomes but always a subset of the lower-income countries. However, low income countries tend to struggle and fail to grow more rapidly than high-income countries: but a subset of the lower income countries show a fast pace in economic growth. If poor countries can create fine economic policies and institutions, they will be able to raise their per capita incomes by investment in technology and other elements in developing the economic growth. There are still big bills that are left on the sidewalks to pick up.