Why Did America Fail? Why Europeans Collapsed and Why They Haven’t: Why America Had a Reversal in Fortune
Rioters took over the United States Capitol on January 6th, 2021. The transition of power to a leader elected by the people was one of the bedrock institutional traditions of our democracy and felt like it was in jeopardy.
Americans feared that there could be more violence on Inauguration day. National Guard troops arrived on the capital to maintain order. Our democratic institutions were more fragile than ever.
When Acemoglu and Robinson wrote Why Nations Fail almost a decade ago, they used the United States as an institutional success story. They acknowledge the nation has a dark side: slavery, genocide of Native Americans, the Civil War. But it’s also a creature of the Enlightenment, a place with free and fair elections and world-renowned universities; a haven for immigrants, new ideas and new business models; and a country responsive to social movements for greater equality. Lucky for America — and its economy — its inclusive institutions have had a helluva run.
Three men have won the economics prize, which was awarded for their research into the different outcomes of former European colonies.
In order to argue that institutions are critical to determining how rich a nation becomes, it would be necessary for Acemoglu, Robinson, and Johnson. But, being economists, they also did some incredible statistical work to try and prove it.
Acemoglu, Robinson, and Johnson argue that these institutional differences persisted over time, explaining why there was a reversal in fortune — that is, why North America became so much richer than South and Central America. The paper shows that Europeans colonized other countries.
Why did this reversal happen? Acemoglu, Robinson, and Johnson argued that it’s all because of differences in the institutions created by European colonizers. European countries created institutions that protected individual freedom and property rights, supported innovation and entrepreneurialism, and promoted the rule of law to serve their economies well in the upcoming industrial revolution. The reason why Europeans set up inclusive institutions here, the prize winners explained, was because North America had a smaller, less dense indigenous population, so the Europeans could settle in large numbers and set about governing themselves.
Why January 6th wasn’t a singular day of failure for Daron Acemoglu, an economist with a Nobel prize for an explanation of why nations fail
I was very excited when I found out that I was going to receive the award. I have been looking over his research for a long time. In fact, one of the joys of my job at Planet Money has been getting to speak with him on multiple occasions and being able to pick his brain.
Yesterday, Alex Tabarrok from George Mason University said that he is an absolute monster of productivity who racks up the papers and citations at nearly unprecedented rates.
Given the Nobel news, we figured it’d be worth revisiting this newsletter from January 2021, which explored their ideas about the power of institutions and how they thought those ideas related to the United States during a volatile period in our history. Here it is (you can also read it here):
“I don’t think January 6th was a singular day of failure,” says MIT economist Daron Acemoglu, who co-authored the book with University of Chicago economist James Robinson. The reason it didn’t happen until January 6th is surprising to me.
Source: A Nobel prize for an explanation of why nations fail
The Rise of the Inclusive: Delaying the Industrialization of South Korea, and Reclaiming the High Ground of Democracy – a Poincar’e For Them?
Nations like South Korea have what Acemoglu and Robinson call “inclusive institutions,” such as representative legislatures, good public schools, open markets and strong patent systems. Inclusive institutions educate their populations. They invest in infrastructure. They fight poverty and disease. They encourage innovation. They are far different from the “extractive institutions” found in countries like North Korea, Venezuela and Saudi Arabia, where small groups of elites use state power for their own ends and prosper through corruption, rent-seeking or brutally forcing people to work.
“We are still at a point where we can reverse things,” he says. “But I think if we paper over these issues, we will most likely see a huge deterioration in institutions. It can happen very quickly.
Political leaders need to focus on those who have been left behind and give them a leg up and a stake in the system if we want to prevent ourselves from sliding into national squalor, argues Acemoglu. He advocates for a “good jobs” agenda that envisions policy changes and public investments to create, naturally, good jobs and shared prosperity (read more here). Robinson, citing the work of Harvard University political scientist Robert Putnam, argues we should find ways to transcend our political and cultural differences and connect with fellow citizens beyond our political tribes.
Robinson says that Trump understood the grievances in a way the traditional parties didn’t. I think he doesn’t have a solution to any of them. The populist experience in Latin America was similar to the one we saw in Canada, where there were no solutions for success. Juan Pern and Hugo Ch Chavez may have solutions to these problems. No, but they exploited the problems brilliantly for political ends.”
For Acemoglu and Robinson, more democracy is the answer to our political and economic problems. In a gigantic study of 175 countries from 1960 to 2010, they found that countries that democratized saw a 20% increase in GDP per capita over the long run.
“Democracies are going through a rough patch,” Acemoglu said. “And it is in some sense quite crucial that they reclaim the high ground of better governance, cleaner governance, and delivering sort of the promise of democracy to a broad range of people.”
The Edward W. Acemoglu Prize: The Rich and Poverty of Nation’s (Micro)Economists
Despite its autocratic governing structure, China has lifted hundreds of million of people out of poverty and become the world’s second-largest economy.
“Introducing democracy is very hard,” Acemoglu said. “When you introduce elections, that sometimes creates conflict. And in particular, in already polarized societies, elections can lead to short-lived outcomes that are sometimes not democratic in nature.”
The researchers found that colonies where a large number of settlers survived were more likely to set up inclusive, democratic institutions. Those where relatively few settlers survived often formed more autocratic, extractive institutions and ended up languishing.
The announcement happened on a holiday that commemorates both Christopher Columbus and the indigenous people of the new world.
“Rather than asking whether colonialism is good or bad, we note that different colonial strategies have led to different institutional patterns that have persisted over time,” Acemoglu said during a news conference in Stockholm where the prize was announced.
The prize, which is worth about 1.058 million dollars, is being shared by two MIT professors and one University of Chicago professor.
The wealth and poverty of nations has been a preoccupation of economists since Adam Smith founded the discipline 250 years ago, when he wrote a book titled, The Wealth of Nations.