Unexplainable Differences?

This book by Daron Acemoglu and James A. Robinson, published in 2012, explores why living standards and prosperity differ so much across societies that seem to share common geography or culture. Many theories, such as those based on geography, culture, or ignorance, suggest these differences should not be so large. Yet, as the authors show, a simple fence can separate success from failure.

A key example in the book is Nogales, a city split by the border between the USA and Mexico. In the northern section, Nogales, Arizona, people enjoy a higher standard of living, better life expectancy, and strong property and voting rights. Just across the fence in Nogales, Sonora (Mexico), people face weak education, higher child mortality, political corruption, and average household incomes that are about a third of those in Arizona. Further similar examples from the book include the difference between North and South Korea, the United States and Russia, or parts of Europe and sub-Saharan Africa.

Key Concepts and Ideas

Acemoglu and Robinson introduce several important ideas to explain why some societies develop institutions that encourage broad prosperity, while others maintain structures that limit economic growth and political freedom.

One type of institution is Political Institutions. These determine how power is gained, used, and restricted, such as through voting systems or constitutions. Centralization is a key factor for these institutions. When a government has enough power, it can enforce laws, maintain order, and coordinate resources. However, if that power goes unchecked, elites can use it to exploit the population. In pre-revolutionary Russia, for example, the Tsar held almost absolute power, leaving most people without a political voice, whereas in Western nations today, the power of politicians is much more restricted.

Another type is Economic Institutions. These set the rules for economic activity, such as property rights, contracts, and the freedom to trade and innovate. Incentives play a crucial role here. When people can benefit from their own work, investments, or ideas, innovation grows, leading to lasting prosperity. In contrast, economic institutions in parts of the Austro-Hungarian Empire between 1867 and 1918 often discouraged entrepreneurship and made it hard for people to move up in society. Meanwhile, people in England enjoyed strong property rights and patent enforcement, which encouraged them to start the Industrial Revolution.

Extractive vs. Inclusive Institutions

A key part of the authors’ argument is the difference between two types of institutional frameworks (both political and economic):

  • Extractive Institutions, which concentrate power and wealth in the hands of a small elite. The basic principle is that a few individuals in the ruling class extract resources from the rest of society, becoming very rich. Although extractive institutions can generate short-term growth, they tend to fail in the long run. A historical example is colonial regimes in Africa, where resources and labor were exploited for the benefit of a distant ruling class.

  • Inclusive Institutions, which distribute power more broadly and protect the rights of many people. The principle here is that both political power and economic benefits from productivity are shared not only with elites but with the whole society. This fosters competition, entrepreneurship, and innovation, driving long-term economic growth. England after the Glorious Revolution of 1688 moved toward more inclusive institutions, setting the stage for the Industrial Revolution.

Critical Junctures

Critical junctures are major turning points in history—such as revolutions, wars, disease outbreaks, or political reforms—that can shift a country’s trajectory. Societies might adopt more inclusive institutions or, conversely, become even more extractive. The outcome often depends on the state of institutions before the crisis. Examples include the Black Death in 14th-century Europe or the Industrial Revolution in 18th-century England. Different societies had different conditions when these events occurred, leading to different reactions.

The Meiji Restoration in Japan is another example. Sparked by the arrival of U.S. trade ships, it led to rapid modernization of political and economic institutions, helping Japan become an industrial power. The concept of critical junctures highlights the role of chance in history, making it difficult to predict long-term outcomes with certainty.

What the Book Says

Now that we have explained the book’s main ideas, we can examine its major conclusions.

Theories That Don’t Work

Acemoglu and Robinson first critique three common explanations for why some nations fail while others succeed:

  1. Geography Hypothesis:
    This theory claims that a nation’s physical environment—such as climate and natural resources—is the main determinant of wealth or poverty. The authors disagree. North and South Korea share the same peninsula and climate but have vastly different economic outcomes due to differences in institutions.

  2. Culture Hypothesis:
    This theory attributes economic success to religious beliefs, work ethic, or social values. However, nations with the same culture can have very different economies. Before Germany’s reunification, East and West Germany had a shared cultural heritage but vastly different living standards due to differences in political and economic institutions.

  3. Ignorance Hypothesis:
    Some argue that nations fail because their leaders do not know how to create growth. The authors counter that many leaders understand which policies foster development but choose not to implement them. In places like Sierra Leone, elites often prioritize maintaining their own power over enacting reforms that would benefit society as a whole.

Main Theory

The book’s core argument is that inclusive political institutions lead to inclusive economic institutions, which create incentives for innovation and growth. In contrast, extractive political institutions tend to produce extractive economic systems that concentrate wealth and power.

However, history shows that even extractive institutions are better than having no institutions at all (i.e., anarchy). Societies often transition from no institutions to extractive ones, as centralized control at least provides some stability. Whether extractive institutions evolve into inclusive ones depends on circumstances and key individuals within society. This transition is often not peaceful.

Key ingredients for this transformation include:

  • Broad-based demands for change: It is not enough for a single group, such as peasants, to push for reform. Multiple social groups—such as workers, merchants, and marginalized communities—must demand change to prevent new elites from simply replacing old ones.
  • Limits on political authority: Representation, such as a parliament, helps prevent the concentration of power in the hands of a few.
  • Strong institutions to protect rights: These include property rights, patent protections for intellectual property, and an effective legal system to enforce contracts.

The authors emphasize that institutions matter more than geography, culture, or ignorance. However, they caution that their theory has limitations—purely observational studies cannot rigorously apply the scientific method, and history contains many unpredictable elements (such as critical junctures). Still, their framework provides insights into which political movements are more promising and which policies are likely to lead to better outcomes.

The Glorious Revolution and the Start of Industrialization in England

One of the book’s most important case studies is England’s Glorious Revolution of 1688. This event reduced the power of the monarchy and established a parliament, creating a more balanced government. Over time, this stability encouraged investment and business growth, ultimately helping to spark the Industrial Revolution.

Human History as a Struggle Between Elites and Society

The grand theme of human history is that those in power have long fought to preserve their status and rule, often at the expense of broader societal progress. This struggle continues today, driven by individual incentives. While society as a whole would benefit from a more equitable distribution of wealth, those in power fear losing their advantages.

A key tragedy is that when people do not directly benefit from their work, they become less motivated and less incentivized, leading to lower overall economic output. As a result, societies led by extractive elites tend to experience stagnation and long-term poverty.

For example, in the Austro-Hungarian Empire, the Habsburgs frequently curtailed efforts to expand political rights in order to maintain their power. Similarly, in Tsarist Russia, the government suppressed calls for constitutional reform and limited industrial changes that might have reduced the Tsar’s control. This resistance to change slowed progress and eventually led to social unrest, as seen in the revolutions of 1848 in Austria-Hungary and the revolutions of 1917 in Russia.

Virtuous Circles and Vicious Circles

  • Virtuous Circles:
    Countries with inclusive institutions benefit from a cycle of positive feedback. If inclusive institutions are in place or steps in the right direction are taken, it becomes more likely that they will persist and continue evolving. For example, in the United States, even a strong leader like President Franklin D. Roosevelt could not override the Supreme Court, demonstrating how well institutional checks on power functioned. Similarly, in England, broad opposition to oppressive laws like the “Black Act” proved that multiple power centers could prevent any single group from taking over completely. A more modern example is Japan after World War II. The establishment of democratic institutions created conditions for rapid economic growth and the rise of a large middle class. Once institutions become more inclusive, they tend to reinforce themselves, as people with political power have a stake in maintaining a fair and functional system.

  • Vicious Circles:
    Under extractive institutions, nations often get stuck in a downward spiral of instability and repression. When power is concentrated in the hands of a small elite, they have strong incentives to maintain their position, even if it harms overall progress. This means that countries with extractive institutions in place are likely to remain so or even become more oppressive over time. Sierra Leone is an example of a country trapped in this cycle. Repeated coups, civil wars, and corruption have prevented the establishment of stable institutions, keeping wealth concentrated in the hands of a few. In the American South, slavery and later discriminatory laws created deep inequality and harmed economic progress for generations. The Democratic Republic of Congo has also struggled with this problem. Colonial rule set up extractive institutions, and after independence, power repeatedly fell into the hands of leaders who continued the same extractive practices. Corruption and conflict drained the country’s resources, making it nearly impossible to develop inclusive political or economic systems. The key takeaway from the concept of vicious circles is that once extractive institutions are in place, they often sustain themselves through oppression, weakening any forces that could push for change. Overcoming such a cycle usually requires a major disruption—often through revolution, war, or external influence.

Side Notes

Here, I want to provide examples of topics mentioned in the book that, while not the main focus, are nonetheless very important.

  • Growth Under Extractive Institutions
    Stalin’s Soviet Union achieved rapid industrial gains, especially during the Five-Year Plans. However, it relied on forced labor, strict state control, and limited freedoms, which reduced genuine innovation and flexibility—factors that eventually weakened the economy.

  • Diffusion of Prosperity
    Inclusive institutions can spread when ideas, technology, and good governance cross borders. Australia, for example, adopted parliamentary ideas from Britain through its colonial past, resulting in a stable democracy and a strong economy. Similarly, after periods of turmoil, France built more inclusive republican institutions that both influenced and were influenced by its European neighbors.

Conclusion

“Political institutions must bring centralization and law and order. Only then can incentives for individuals be created to promote economic prosperity. Without inclusive economic institutions, in which everyone has a stake, prosperity is not sustainable.” Much of human history shows a struggle between elites who want to keep their power and those who want broader reforms. Leaders of extractive regimes often find it safer to hold onto power, even if that holds back overall progress, than to share power with more people.

Source

  • Why Nations Fail by Daron Acemoglu and James A. Robinson: amazon