Second in an ongoing series, Books for Our Times.
Why do nations fail? In two words: "extractive elites."
According to a compelling book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, co-authored by two economists, it's not the vagaries of geography, climate, or culture that determine the prosperity or poverty of a nation. It is a nation's institutions, political and economic.
The more inclusive those institutions are -- pluralistic in composition, centralized to a degree, ensuring the rule of law, property rights, and individual reward -- the more likely and long-lasting a nation's prosperity. Not so with nations where an elite, aristocratic or political, extracts the economic assets -- natural and manufactured -- by means of monopoly, coerced labor, expropriation of land, and exemption from taxation, all guaranteed by control of the military and security apparatus, and who mold in their favor whatever political institutions there are, including the courts.
In turn, acting as a multiplier effect is the "virtuous circle" of activity generated by inclusive institutions and the "vicious circles" of extractive ones. Depending on its institutional health, a nation can capitalize on, or be overwhelmed by, transformational "critical junctures" in history such as the Industrial Revolution, the rise in the Atlantic sea trade, or pestilence such as the Black Plague.
This unified theory, the result of 15 years of research and publication, is put forth by Daron Acemoglu of M.I.T. and James A. Robinson of Harvard. Written without academic jargon and bearing a rich lode of historical and cultural evidence, their book provides a helpful lens to the layman trying to understand: Is America in a fall? At least that's why this layman came to it: Not only do the broad categories of extractive and inclusive institutions seem a useful measure, but extractive elites seems a reasonable explanation for our present unwinding, about which, more later.
While other experts espouse other theories relating, pointedly, to geography, climate, and culture (which Acemoglu and Robinson readily dispose), these lay out their theory, one argument at a time, that it's all, all, all about institutions. If their book is repetitive, it's because they see their theory borne out time and again over two millennia. By all their criteria, nations faring best in this grand competition are: the United States, Britain, France, Japan, Brazil, and, in Africa, Botswana. Tellingly, the authors do not include China, which they believe, because of its extractive and corrupt governing elite (the Communist party) and because of little pushback from below by the people for political inclusion, will falter and fade in time.
The book is especially illuminating on the ways extractive elites extract and do their harm. For example, from an extractive point of view, technological progress is not always a good thing: It's good if it increases the wealth to be extracted, but not at the risk of uncontrolled social turmoil or, worse, revolution. Even urbanization, early on, was seen as a threat: Too many workers amassed in one place were tinder to the spark of revolution. Long before the economist Joseph Schumpeter enunciated his theory of "creative destruction" -- how new industry plows under old industry and capitalism destroys the old economic order -- extractors throughout history have intuited the need not only to control all means of production, but innovation, too.
Thus, in the 19th century the Russian czar ruled against building a railway system to interconnect his far-flung country: Social order was maintained but at the cost of competing in the Industrial Revolution sweeping Europe and the U.S. Likewise early China: After giving the world such inventions as the compass, the clock, gunpowder, paper, and porcelain, successive emperors sought to ensure their power by closing off the country to international trade and travel -- and closing off industrialization and the contagion of modernity: "By the time Mao set up his communist regime in 1949, China had become one of the poorest countries in the world."
Notorious examples of extraction include the Spanish conquest of South America and its extraction of precious metals, through the murder or enslavement of indigenous peoples and a neat legalism called amparo exempting the extractor from the law. There were the Ottoman empire and the colonial empires of the British, Dutch, Belgians, and Portuguese in Africa and Asia. Sadly, in Africa, many modern-day independence movements, inexperienced at governance, succumbed in turn to the rule of one unscrupulous, extractive "big man." (In a ludicrous extension, the book cites Zimbabwe's despotic president Robert Mugabe winning the national lottery.) Botswana, happily, steered itself to good governance and economic health.
Of course, the most notorious means of extraction, and the most inhuman, is the institution of slavery. The authors trace this evil institution from the colonial slavers, to the African sellers of slaves (often captives in tribal wars), to the slave-owners of the American South, whose extractive hold continued after the Civil War through Reconstruction and the Jim Crow era, broken finally by the modern civil rights movement and more fully inclusive legislation.
How to break the extractive cycle? To counter the seemingly natural urge of elites to extract (and their seeming inability to control or reform that urge and share), pushback from below is required -- and everything depends on how that pushback is conducted, how reform or revolution play out.
The Russian Revolution, in overthrowing the czar, went too far in its coercion of the masses through terror and its stultifying, ultimately unsustainable state control of industry. England was more fortunate: With its Glorious Revolution in 1588, when the nobility forced the extractive monarch to share power with Parliament, and with its economic base radically broadened, England was in position to capitalize on the Industrial Revolution a century later, triggered by the invention of the steam engine by the Englishman James Watt. (Actually a Frenchman made the invention before Watt but encountered too many barriers to market and died unknown.) As for France, after recovering from the terror following its revolution of 1789, France set itself, with Napoleon's guidance, on the path to industrialization. Japan saved itself in the 19th century when rival shoguns overthrew the ruling extractive shogunate and set in train the Meiji restoration, replacing feudalism with a modern bureaucratic state and introducing individual property rights, a written constitution, and an elected parliament -- inclusive institutions enabling Japan to become Asia's first beneficiary of the Industrial Revolution. Brazil made the tricky transition from extractive to inclusive institutions when an able leader from below, Lula da Silva, a union leader who organized the Worker's Party, was elected president and governed successfully.
As for the United States, it's become conventional wisdom to note how fortunate we are in our Founding Fathers, whose instinct was for inclusion (though limited initially to white men of property). What's instructive is to be reminded, as this book does, how aristocratic elites in our colonial years laid claim to vast manorial estates, notably Sir Thomas Dale in Virginia, Lord Baltimore in Maryland, and Sir Anthony-Ashley Cooper in Carolina. Fortunately, our settler ancestors threw off the yoke before it cinched tight, demanded their own land rights and created their own legislative assemblies. "It was these assemblies....that coalesced to form the first Continental Congress in 1774, the prelude to the independence of the United States."
Now, to our present concern: Is America a failing nation?
The authors don't address this question directly, although, with so much talk of America's decline, the book's title bears a certain promise it would. Nor does the book discuss the 2008 financial crash and our fumbling response to it these five years later, even though, published in 2012, it might have. Rather, the book's value is to provide the reader with a categorical measure: Is a given institution inclusive or extractive? Also, it's encouraging to keep in mind the authors' assertion that, in our basic institutions, America is in a good place historically and economically. And I'd point out the American labor force remains hard-working and dedicated, abiding "creative destruction" as the price of progress, willing to retrain and retool.
Yet, the authors do claim that, ultimately, extractive elites are a civilizational killer. And we do have an extractive elite -- Wall Street and the 1 percent -- that, far from reforming itself voluntarily to share the wealth or show gratitude for the life-saving bailouts extracted from the taxpayer in '08, actually is growing more powerful and extracting even more of the nation's assets: For example, Wall Street banks are now moving to sway the commodities markets and manipulate energy prices -- all of which mean, of course, higher prices for Main Street. Not since the Great Depression has income inequality been so extreme between the 1 percent and Main Street, as Nobel economist Joseph Stiglitz repeatedly notes (also here, here, and here). And tax time is no reckoning: When major corporations like Apple don't pay their fair share of corporate taxes -- or, astoundingly, G.E. which "achieved a perfect zero" on its U.S. tax bill in 2010 -- the net effect is extractive. Generally speaking, our economic machinery, if not wholly dominated by the extractive elites , can be said not to be inclusive.
Theoretically, balance can be achieved through the political institutions. But, as widely acknowledged, Congress is broken. Its chief product to address the '08 crash, the Dodd-Frank bill, has been considerably watered down by Wall Street lobbyists. A ray of hope lies with the introduction (little noted in the media) of the New Glass-Steagall Act, which would turn banks from casinos back into utilities, co-sponsored by senators Elizabeth Warren and John McCain. And what about the tax code which goes so easy on corporations? And the lax regulators? (See here for hopeful news.)
Realistically, though, little can be expected from Congress when the Republicans, party of the wealthy, continue to vent their extreme anti-government rhetoric. But government is required: Nations fail, as this book points out, without centralization and regulation. Why are we still arguing this elementary point? Even the Supreme Court in recent rulings appears to favor corporations and the rich (see Citizens United). And President Obama seems disinclined to inveigh, as Teddy Roosevelt did, against "the malefactors of great wealth." Yet the dangerous truth is, as this book demonstrates over and over, economic inequality translates to political inequality -- and ultimately a nation's failure.
Where's the pushback from below? Occupy Wall Street, while it ultimately failed, at least struck at the extractive heart of the matter: greed. It was, as the seismic public response confirmed, a signal contribution to name the greed of Wall Street and the 1 percent as our chief problem, and in calling out greed, to elevate it as a moral problem: Extreme income inequality is simply not right. But Occupy crippled itself in refusing to engage politically. Perhaps other voices on Main Street will take up that banner and carry it all the way to Washington? Perhaps Congress and Mr. Obama will wake up, stop blaming Washington, and start representing Main Street?
Meantime, and disappointingly, Wall Street and the 1 percent show little sign of reforming their extractive ways. I am not speaking of a moral awakening or even a renewed patriotism -- that would be fantasy. But it's dispiriting to see that no George Washington visionary has come forth and pointed out to his super-rich peers that -- both as business model and brand -- the extractive model, while it may work in the short term, cannot endure in the long term. Such a visionary would be the savior of American capitalism and democracy.
To put it in the language of extraction: Any takers?
Carla Seaquist is author of a book of commentary, "Manufacturing Hope: Post-9/11 Notes on Politics, Culture, Torture, and the American Character." Also a playwright, she is author of the recently-published volume, "Two Plays of Life and Death," which include "Who Cares?: The Washington-Sarajevo Talks" and "Kate and Kafka," and is at work on a play titled "Prodigal."