Why Nations Fail

Why Nations Fail offers an explanation of prosperity that I want to believe: societies flourish when people can participate in political and economic life, take risks, and challenge established interests.

Its historical examples are compelling. However, I finished the book with a question: what evidence would show that its explanation is wrong?

Main thesis

As I understand it, the book argues that broad participation creates incentives to invest and innovate. Concentrated political power can undermine those incentives because innovation, through the process of creative destruction, threatens the position of existing elites. Those elites may therefore resist changes that would enrich society as a whole while weakening their control.

In short, maybe you have a Henry Ford or Nikola Tesla among the people in your society, including those enslaved or living as peasants. You had better make the most of that potential by ensuring those folks are free, heard, respected, and able to participate in free markets. Your entire nation will be better off if they can put their skills to use.

It is a bit like an elite sports team or a company:

• You want the absolute best people to compete, irrespective of their origins, pedigree, social class, or religion.
• You want to focus on results to maximise success.

Yet in many of the historical examples, the elites maximised their own success instead of their nation's.

Concrete example

The book illustrates its thesis with many historical examples in which some nations were more inclusive than others. My favourite example is the Venetian state. Venice was highly prosperous and a major trading power between the 10th and 13th centuries. The book connects this prosperity to arrangements such as the commenda, a partnership between a wealthy investor funding a venture and a young entrepreneur sailing overseas to trade.

In the book's account, these partnerships allowed young men outside established wealthy families to sail overseas and, if successful, reap a share of the profits. This allowed wealth to be created beyond those families and rewarded risk-taking.

Conversely, if only wealthy families had been able to trade, perhaps they would not have traded as much or ventured as far. Perhaps they would eventually have been satisfied with what they had and would not have shared their wealth with others.

However, over the years, those same entrepreneurs and risk-takers demanded higher barriers to entry to preserve their positions and avoid being threatened by new entrants.

The authors describe Venice as one of the most powerful European states between the 10th and 13th centuries, yet nowadays it is basically an open-air museum for tourists of varying means.

This example makes total sense to me. I'm a huge proponent of fair opportunities for newcomers. I deeply want to believe that there is a fundamental law of the universe that rewards openness, fairness, and risk-taking.

However, how much confidence can I have in the book if it presents its arguments in a way that makes them irrefutable?

Main issues

What counts as national failure?

Is it civil war, military defeat, a lack of democracy, low GDP, a low HDI, or something else?

I believe the authors mean that a nation fails when it is left behind economically compared with other nations of its time.

How do we identify inclusiveness before knowing the outcome?

Venice could expand opportunities for some people while excluding others. Do we measure inclusiveness by the proportion of the total population that can participate? Or do the authors mostly mean that a nation is more inclusive than other nations of its time?

Can we classify a nation's institutions without first knowing whether it is prosperous?

Over what period do we assess prosperity, and why?

At one point, the book argues that extractive political institutions—institutions in which elites extract more value than they create and distribute to the broader society—can still create prosperity, but only for a short time.

The authors use the Soviet Union as an example of a state that managed to industrialise rapidly in the 20th century but did not manage to sustain its prosperity.

They argue that extractive political institutions can only create prosperity over the short term.

I want to believe this, but what time window are we working with?

The authors consider Venice inclusive and an example of prosperity between the 10th and 13th centuries. Yet it failed to deliver prosperity consistently over time.

One could also argue that inclusive political institutions fail to remain inclusive enough over time. The more prosperity increases, the greater the reward for establishing extractive political institutions.

Conclusion

I find the book's explanation persuasive. However, my impression is that the authors' arguments are vague and broad enough to resist any attempt at refutation. If you point to what you believe is a counterexample, one could always argue that:

• This nation was not inclusive enough. But when is enough, enough?
• This nation did not manage to sustain prosperity over the long term. But what does “long term” mean here? How many years or centuries?

It feels as though the book shies away from putting its core thesis to the test!