David R. Henderson  

Acemoglu and Robinson on the Wealth of Nations

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Acemoglu and Robinson divide countries into two types: extractive and inclusive. In extractive countries, one group--usually a very small minority--uses coercive power to grab wealth from and, often literally, enslave a larger group. In inclusive countries, political power is widely shared, and, therefore, it is hard for one small group to be in control. The majority of the people in extractive countries have very little incentive to produce wealth because they know that the powerful group will take it from them. Summarizing their case, the authors write, "Nations fail today because extractive economic institutions do not create the incentives needed for people to save, invest, and innovate." In inclusive countries, by contrast, no one small group is in control, and so the economic institutions tend to work for most groups. And what are these institutions? The ones that a fan of Adam Smith might expect: respect for private property, the relative absence of government-granted privilege, and the rule of law.
This is from David R. Henderson, "The Wealth--and Poverty--of Nations," in Regulation, Spring 2013. It's a review of Why Nations Fail by Daron Acemoglu and James A. Robinson.

Another excerpt:

The authors apply their extractive/inclusive dichotomy to countries around the world and get a lot of mileage from the paradigm. We have examples of highly extractive governments even in the modern world. One shocking one, to me at least, is the case of Uzbekistan. The Soviet government had imposed a highly extractive regime--communism--on Uzbekistan, with government ownership of all farmland. But when communism ended, the new government's first president, Ismail Karimov, simply refashioned the extractive system. He forced farmers to grow cotton and sell it to him at artificially low prices so that he could export it at world prices. Because of the low prices they received, cotton farmers were unwilling to invest in new harvesting machinery, reducing the harvest. So what did Karimov do? He turned children into slaves, taking them out of school for the two months of harvest season and assigning them to farms. How much are they paid? In 2006, when the world price of cotton was about $1.40 per kilogram, the children--who harvested 20 to 60 kilos per day (worth, therefore, between $28 and $84)--were paid three cents per day.

One of the authors' best expositions is about the second-largest economy in the world, China. They trace the horrible results of Chairman Mao's homicidal policies in the 1950s and 1960s and unearth a quote in which Mao expressed his admiration for Adolf Hitler. They also lay out how the relaxation of government controls on agriculture in the early 1980s "led to a dramatic increase in agricultural productivity." Surprisingly, they do not cite Kate Zhou's How the Farmers Changed China, which tells the story in more detail. They argue persuasively, though, that Chinese growth "will run out of steam unless extractive political institutions make way for inclusive institutions."


Here's part of the review in which I'm critical:
Possibly related to their mistelling of the story of U.S. trusts, all the examples they give of extractive institutions are of small, wealthy minorities extracting wealth from large, poor majorities. They omit another possibility that seems to be happening in modern-day America under President Obama: A government of elitists that, claiming to speak for the large less-wealthy majority, extracts wealth from a small wealthy minority. This omission is somewhat surprising. In their discussion of Africa, the authors point out that for the Kongolese to be productive would not have been worthwhile "since any extra output that they produced using better technology would have been subject to expropriation by the king and his elite." We are not, in America, at the point where any extra output will be taken by the government, but we are much closer to that point than we were just a few years ago. In high-tax California, for example, where many productive people are rumored to live, those making $1 million a year or more have 13.3 percent of their extra output taken by the state government, up from "only" 10.3 percent last year, and 43.4 percent of their extra output taken by the federal government, up from "only" 37.9 percent last year. Marginal tax rates above 50 percent would certainly seem to damage incentives. Yet the authors never address this issue. That's disappointing.

Russ Roberts interviewed Acemoglu on his book a year ago.

HT to Jeffrey Hummel for filling me in on the convergence of southern and northern incomes after the Civil War. This led to a key paragraph in the review.



COMMENTS (12 to date)
Daniel Kuehn writes:

I'd love to hear more about your conversation with Hummel and what Acemoglu and Robinson claimed about the South and convergence. What I've been taught on this (which I always thought was mainstream - it's the Gavin Wright story which seems like it's awfully mainstream when it comes to Southern economic history) is that there was not convergence until the eve of the Civil Rights movement. Wright's recent book makes the case for convergence as a direct result of the Civil Rights movement (and earlier research by Freeman, Card, Krueger, etc. on black/white convergence ties a lot of it to the Civil Rights Act).

So I found that interesting - but it's hard for me to evaluate not knowing what A&R said and what Hummel said. And of course maybe my professor wasn't up on the recent literature.

Daniel Kuehn writes:

Obviously the black/white convergence question and the North/South convergence question are different - but they're related. And Wright has treated both.

Troy Camplin writes:

Excellent points. I have been thinking along these lines in regards to primate sociobiology:

http://zatavu.blogspot.com/2013/03/why-arent-chimpanzees-wealthy.html

We can also see this in the History Channel's show "Vikings."

david writes:

Troy, your blog seems to misconceive how chimpanzee society works.

Prof Henderson, Acemoglu and Robinson carefully emphasize the need to have elites with an interest in sustaining growth - to have the pie grow bigger without compromising the political order. For this, there must be some rent. This insight is common amongst the New Institutional Economics types. For instance, A and R quote North, Wallis, Webb, & Weingast saying

“[T]he appropriate counterfactual from eliminating rents is not a competitive market economy ... but a society in disorder and violence.”

so I would hesitate before drawing libertarian interpretations from it. The A and R argument against extraction is not in principally in terms of the marginal incentives on the weak extractee, but on the marginal incentives on the powerful extractor toward creative destruction that may compromise the extraction! That is what they mean by the damage caused by "extractive institutions".


More A and R
:

More than a century after the Gilded Age, a new era of great opportunities, this time underpinned by advances in information and communication technology and globalization, has again coincided with a huge increase in economic inequality in the United States. Part of this inequality is a byproduct of the structural transformation of our economy. For example, the technological developments that have swept the US labor market can account for why the demand for workers with high school degree or less has plummeted. However, they cannot plausibly account for why the top 1% of Americans captured almost 25% of national income in 2007, up from 9% in 1974. For the 0.1% this has gone from 3% to 12% (Piketty and Saez, 2003).

This rapidly increasing inequality is similar to that which emerged in the Gilded Age in the sense that it went along with not only economic growth but also an increasing capture of the political system by the wealthy (Bartels, 2010, Hacker and Pierson, 2010). The capture of the political system is underpinned by the increase in economic inequality as well as several other factors creating a platform for the wealthy to monopolize politics to a recently unprecedented extent.... As inequality increased the rich were able to push government regulation and policy in their favor, thus creating even more inequality. Just as in the Gilded Age, this trend threatens the inclusive nature of US economic institutions.

Steve Sailer writes:

Here's my review of Acemoglu and Robinson's book from last year:

Occam's Butter Knife

http://takimag.com/article/occams_butter_knife_steve_sailer/print#axzz2PWpJgsSj

David R. Henderson writes:

@Daniel,
The study on convergence that I know of, although it's hard slogging, is Bob Barro and Xavier Sala-i-Martin, 1990. "Economic Growth and Convergence across the United States," Working Paper 3419. NBER. Here's the link. Unlike many NBER Working Papers, it is not gated.

Here's their conclusion:

Our empirical results document the existence of [beta]-convergence; that is, the tendency for economies that are further below the steady-state position to grow faster. This phenomenon shows up clearly for the U.S. states over various periods from 1840 to 1988. Over long samples, poor states tend to grow faster than rich states even if we do not hold constant any variables other than initial per capita income or product. If we hold constant the region and measures of sectoral composition, then the speed of convergence appears to be roughly the same—about 2 to 2—1/2 percent per year—regardless of the time period or whether we consider personal income or gross state product.

Troy Camplin writes:

david,

I am quite aware of how actual chimpanzee societies work vs. the Rousseauian romantic view of how they work. In all of my own work, I always start with what the chimpanzees are doing, and try to figure out what the humans are doing from there. Maybe learning a little chimpanzee politics would do you some good (the bonobos are a little different, because since the females are dominant and will take the meat, the males don't bother to hunt much). I'd keep away from the popular versions of chimpanzee behavior.

Troy Camplin writes:

There is no misconception of how chimpanzee societies work. Just a non-romantic one. Learn about chimpanzee politics. There is a lot of information out there about how chimpanzees behave in the wild. They are social, hierarchical, and are dominated by a powerful alpha and his cronies.

david writes:

Yes, that is precisely the misconception I sensed. Male status in chimpanzee society is not rigidly determined by physical strength, and maintaining support from weaker chimpanzees and senior females is crucial.

Chimpanzee seniority status can be challenged fairly often; it is not the older stereotype of ranking by pairwise intimidation. Chimpanzees are intelligent enough to gang up on males senior to them. So it is not true that chimpanzee alphas can just take whatever they want: there is generally some quid pro quo involved, all the way down the seniority ladder.

Matt writes:

I think that the story about the enslavement of Uzbekistani schoolchildren might exaggerate their productivity. When I was a Peace Corps volunteer in Turkmenistan about a decade ago, they also had the system of sending schoolchildren to the cotton fields in the fall. I volunteered to go along once to see what it was like. My recollection is that it was a pretty relaxed day, though I worked less than the children. I'm nearly certain that we averaged less than 20 kilos of cotton per person.
My favorite cotton-picking memory from Turkmenistan was the time I was taking a taxi from my city to a nearby village, and we encountered a roadblock. The police were requiring travelers to pick cotton as the price of passage. The driver and I ran into the field and picked a handful, threw it on the small pile of dirty cotton at the roadside, and then were allowed to proceed.

Michael Strong writes:

Your full review is too kind. Not only did they somehow not mention Buchanan - throughout they manage to avoid mentioning any free market thinkers who were on the right track, nor do they assign any blame to the wrong-headedness of intellectuals. For instance, this claim regarding Marxism, on pg. 126, is a jaw-dropper:

"The communist state did not have an effective tax system, so instead Stalin 'collectivized" agriculture. This process entailed the abolition of property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Party."

No role for Marxist ideology? One of the greatest mass murders in human history was somehow an artifact of not having an effective tax system?

Although one can be grateful for the fact that basic classical liberal insights are once again becoming fashionable amongst the economic development mainstream, one can also be frustrated by the fact that they avoid acknowledging the heroism of the classical liberals who were villified throughout the 20th century by socialists who were respected. Where is the vindication of Peter Bauer against, say, a Galbraith who praised Mao's communism in 1973?

Galbraith, in China Passage:

"Things in China give the impression of meshing . . . Something depends on the easy, affable and sensitive manners of the Chinese. One transfers his reaction to this to the society. Dissidents are brought firmly into line in China but, one suspects, with great politeness. It is a firmly authoritarian society in which those in charge smile and say please. The leadership rebukes what is called "Commandism." And there is also the obvious willingness of the Chinese, given the opportunity, to work. But for whatever reason, the Chinese economy appears to function very easily and well.

Thus the Chinese economic system. Ever since Lincoln Steffens returned from Russia to proclaim (to Bernard Baruch), "I have been over to the future and it works, " travelers to the Communist countries have been reluctant to risk hard conclusions. When things go wrong, the skeptics remembered and rejoiced. One should not be craven. The Chinese economy isn't the American or European future. But it is the Chinese future. And let there be no doubt: For the Chinese it works."

David R. Henderson writes:

@Michael Strong,
Thanks for your comments. I agree with them all. I was just pleased to see them tag Joseph Stalin, on that same page, as a mass murderer. But you're right that they don't mention the important role of Marxism.
And you're right that they don't even mention Galbraith, but they do, on pp. 127-128, point out how bad Samuelson's predictions about Soviet growth were.

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