Why Economists Fail

The book Why Nations Fail by Daron Acemoglu and James A. Robinson comes with book-jacket praise from the usual suspects: Steven Levitt of Freakonomics fame, Jared Diamond of Collapse fame, Nobel Prize “laureate” George Akerlof, and Niall Ferguson, champion of imperialism. Thomas Freidman dashed off a quick review in his New York Times column for April 1, 2012. Freidman, the giddy fan of globalization, was ecstatic, although he admitted that he was “reading” the book, but not that he had “read” it. Freidman points out one of the authors’ main points: “Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive institutions that are structured to extract resources from the many by the few.”  And this is perhaps their main point, albeit one which they share with most neoliberal development economists. Acemoglu and Robinson are professors in Cambridge on the Charles, Acemoglu at MIT and Robinson at Harvard University. Acemoglu is a winner of the John Bates Clark Medal in the Economics department and Robinson an economic development and area specialist in the department of Government (Political Science). The book seems to be aimed at a wider audience than academia, however.

While the authors mine an enormous literature on development to populate their book with dozens of interesting stories of developmental failure and success, at the end of the day, their book devolves into the something similar to most of the neoliberal thinking of which we see so much from the “science” of economics. Diamond, who is quoted on the book jacket as saying “Like me, you may succumb to reading it in one go, and then you may come back to it again and again” is more critical in a review in the New York Review of Books (7 June 2012). There he points out that after presenting a map of Africa that clearly shows the tropical countries of the interior of the continent at the lowest end of the income scale they insist that geographic factors are “Theories That Don’t Work” compared to their preferred “institutional” explanation. Diamond’s reaction: “While institutions are undoubtedly part of the explanation, they leave much unexplained: some of those richer temperate countries are notorious for their histories of bad institutions (think of Algeria, Argentina, Egypt, and Libya), while some of the tropical countries (e.g., Costa Rica and Tanzania) have had relatively more honest governments. What are the economic disadvantages of a tropical location?” He concludes, “In their narrow focus on inclusive institutions, however, the authors ignore or dismiss other factors. I mentioned earlier the effects of an area’s being landlocked or of environmental damage, factors that they don’t discuss. Even within the focus on institutions, the concentration specifically on inclusive institutions causes the authors to give inadequate accounts of the ways that natural resources can be a curse.” After describing Acemoglu and Robinson’s botched job in their explanation of the rise of agriculture “to assert, in the complete absence of evidence, that  . . .  hunter/gatherers had become sedentary because, for unknown reasons, they happened to develop innovative institutions through a hypothesized political revolution” he concludes that “Acemoglu and Robinson do themselves a disservice by misstating these findings.”

The book has a few points to recommend it in this reviewer’s mind: 1) Its insistence on uncertainty in the course of human affairs, 2) Its appreciation for the importance of centralized political structure on economic success, 3) Its recognition of the wasted resources that come with gross inequality. But it has glaring blind spots that should cause a critical reader pause.

In the first chapter the authors quote from Fra Bartolome de Las Casas’s book,  A Short Account of the Destruction of the Indies. Las Casas is presented by the authors as a hero, who defended the rights of the indigenous people enslaved in the New World by the conquistadores. They seem positively unaware, however, of the irony that motivated Jorge Luis Borges to mention Las Casas in the very first chapter of HIS book, A Universal History of Infamy. For Las Casas’s answer to the enslavement of the indigenous people of the New World was to import Africans to work in the Antillean gold mines. Thus Borges sees Las Casas not just as the savior of the indigenas of the New World (in which effort he was unsuccessful in any case) but as the father of “W.C. Handy’s blues; . . .  the mythological dimensions of Abraham Lincoln; the five hundred thousand dead of the Civil War and its three hundred millions spent in military pensions; the entrance of the word “to lynch” into the thirteenth edition of the Spanish Academy . .” etc. This kind of irony is well over the heads of our authors.

They take the “failure” of the Mayan civilization to be the result of their favorite themes of “creation of extractive political institutions” and lack of “creative destruction.”  They recognize that “the coalescence of these institutions created the basis for an impressive economic expansion” but see its collapse in the ninth century AD to be the result of the overthrow of the political system that had produced this expansion. They recognize that “existing archeological evidence does not allow us to reach a definitive conclusion about why the k’ubul ajaw and elites surrounding him were overthrown” but they take this collapse as evidence nonetheless for their theory that “extractive institutions” are the cause of that collapse. And concerning their diagnosis of “collapse”, should a Mayan society that apparently thrived for close to one thousand years be considered a failure?  There is no discussion of the possibility that laterite formation in tropical soils had anything to do with this “collapse.” The story of the Mayans just becomes another example of their pet theory.

I have mentioned “creative destruction”. Although there is only one direct mention of the “great economist Joseph Schumpeter” in the book, there are references aplenty to Schumpeter’s most memorable phrase. Creative destruction was explained by Schumpeter’s as follows: “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation – if I may use that biological term – that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism.” (Capitalism, Socialism, and Democracy, page 83.) Schumpeter was convinced that the entrepreneur is the driving force for development in a capitalistic society. Keynes was not so sure, remarking “we are damned if we know” why capitalists invest.

Acemoglu and Robinson seem to take as gospel that creative destruction is necessary for societal advance. Someone like Polanyi would no doubt not agree. Schumpeter’s young Harvard colleague Paul Sweezy certainly did not agree when he participated with Schumpeter in their famous debate at the Harvard Graduate Student’s Economics Club in the winter of 1946-47 (See “on the laws of capitalism, Insights from the Sweezy-Schumpeter Debate” in Monthly Review, May, 2011.) Sweezy’s notes for the debate say that “There is no reason to deny Schumpeter’s entrepreneurial type, but its significance is quite differently evaluated. For him the entrepreneur occupies the center of the stage; the accumulation process is derivative. For me the accumulation process is primary; the entrepreneur falls in with it and plays a part in it.” Sweezy was, of course, one of the most prominent American Marxist economists of the twentieth century. For him the historical process of evolution of society was crucial, as it was for Marx. And Schumpeter, even as an Austrian economist, had a profound appreciation for this. It is not fair to Acemoglu and Robinson to say that they are oblivious to history; their book is full of historical anecdotes. But this reader gets the sense that for them if a society would just get with the program and encourage capitalists, everything would come out all right.

They rail against the monopolies and resistance to enclosure by the Tudor and Stuart kings in England. This is a typical response of the neoliberal. The problem is not market economies, but those that interfere with the “free” motion of these economies in society. They attribute the rise of the Industrial Revolution in England to an overcoming of the absolutism of the Tudors and Stuarts by the rise of “inclusive institutions” embodied in the Glorious Revolution by the rise of Parliament. But the destruction part of the rise of the entrepreneurial class gets little appreciation.

This book contains almost no reference to socialist critique of the development policies which the authors prefer. This, of course, is typical of the environment of American academic departments of economics and political science, where our authors reside. In spite of their re-telling of many stories about the corruption and distortion imposed upon the people of the South by European imperialism in the nineteenth century, there is no mention of Lenin’s Imperialism, Highest Form of Capitalism. No mention of Polanyi. The only significant mention of Marx is in a passage where they say “Lenin and his Communist Party were inspired by Marx, but the practice could not have been more different than the theory. The Bolshevik Revolution of 1917 was a bloody affair, and there was no humane aspect to it.” In fact, the Russian Revolution was remarkably bloodless, since the army went wholly over to the Revolution very early in the process. There is no question that much blood was spilled during the Civil War and that enormous suffering was caused by the Stalinist purges and forced collectivization of agriculture in Russia, but that the authors would assume uncritically that this meant that the Revolution itself was “a bloody affair” is a telling indicator of apparent biases that shield them from facts that don’t fit their view of reality. In a book that is so filled with facts, this ignorance seems systematic; as if they were searching out only the facts that fit their theory.

The authors make an off-hand reference to current day Iraq (on page 444) with amazing lack of empathy for the impact of the “shock and awe” imposed on that country by the Bush/Cheney/Rumsfeld regime and the UN Sanctions that preceded it. They use Iraq’s recent history to argue against the “theory of modernization” that they say “maintains that all societies, as they grow, are headed toward a more modern, developed, and civilized existence, and in particular toward democracy.”  They mention the “disastrous economic performance under Saddam Hussein’s regime” without mentioning the years of pain imposed by continuing NATO-enforced sanctions and bombardment. For a more realistic estimate of that impact the reader is directed to Iraq Under Siege, The Deadly Impact of Sanctions and War, published in 2000, three years before “shock and awe.”  There the reader will find another reason behind that “disastrous economic performance” of the previous decade.  Anthony Arnove in the introduction to Iraq under Siege quotes from a Wall Street Journal article in 1999 citing unnamed US officials saying, “After eight years of enforcing a ‘no-fly zone’ in northern [and sourthern] Iraq, few military targets remain.  . . . We are down to the last outhouse.”  Acemoglu and Robinson say that hopes for “pluralism” were  “dashed as chaos and civil war descended upon Iraqi society.”  This implies that the “chaos and civil war” were the result of some internal dynamic in Iraq without considering that what had descended onto Iraqi society was not just the “extractive institutions” of Saddam Hussein but also the wrath of the American Empire, imposed over a decade of economic sanctions and bombardment since the end of the first Iraq war, “Desert Storm”. They fail to mention the possibility that 6,000 sorties and 1,800 bombs as part of the “longest sustained US air operation since the Vietnam War” had anything to do with the dissolution of Iraqi society that followed the second US land invasion by Bush, the younger.  Iraq had long since been “bombed back to the stone age” to quote an earlier American general talking about that earlier war. Acemoglu and Robinson make no mention of this.

One of the interesting facts that the authors dredge up from the large anthropological and historical literature upon which they report is the story of Dutch colonialism in the East Indies. They tell the story of the Banda Islands which had established trading relations with English, Portuguese, Indian, and Chinese merchants for mace and nutmeg, which were indigenous to their islands. In 1621 the Dutch governor of Batavia (now Jakarta in Indonesia) Jan Pieterszoon Coen “sailed to Banda with a fleet and proceeded to massacre almost the entire population of the islands, probably about fifteen thousand people.”  He set up a plantation system in place of the thriving economic activity of the local Banda people and “divided the islands into sixty-eight plantations, awarded to sixty-eight Dutchmen, mostly former and current employees of the Dutch East India Company.” They use this to support their major thesis, that “European expansion  . . . sowed the seeds of underdevelopment in many diverse corners of the world by imposing, or further strengthening existing, extractive institutions.”  But their emphasis is on the “extractive institutions” and not on the fact that European imperialism imposed this reality by genocidal force of arms. This is a very strange emphasis to place on these facts.

Diamond’s critique in his NYRB article provides a good summary of this book. There he points to “the authors’ resort to assertion unsupported or contradicted by facts.” This book presents what is really a banal conclusion: that authoritarian institutions that impose the will of a small group of elites onto a population is the primary cause of “underdevelopment”. This is a re-statement of Aristotle’s Politics. The real questions are why these authoritarian institutions succeed in taking over power in so many societies and how societies with apparently “inclusive” institutions like those in current day United States have evolved into such unequal societies. This book leaves us no closer to an answer to these questions.

The real problem that I have with this book is that it uncritically takes for granted the underlying assumptions from the neoclassical economist’s tool box. They point out the obvious: “Europeans themselves stamped out the possibility of economic growth in many parts of the world that they conquered;  . . . the lands where Industrial Revolution originally did not spread remain relatively poor; . . . . the Industrial Revolution and other new technologies are unlikely to spread to places around the world today where a minimum degree of centralization of the state hasn’t been achieved.” These conclusions are delivered with a tone of great solemnity, but no one but the most dogmatic libertarians or European chauvinists would seriously disagree. The real question is how to change this. Their prescription of more “inclusion” the like of which we have in the United States may satisfy some, but it does not satisfy this reviewer.

About Randal Samstag

Randal has an undergraduate degree in political philosophy, but has a graduate degree in engineering and has earned his bread for 30 years working on municipal and community water supply and wastewater collection and treatment systems in the US, Caribbean, Latin America, and Asia.
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