Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson

- ## Preface

   - Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.

 - ## 1. So Close and Yet So Different

   - Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.

   - Different patterns of institutions today are deeply rooted in the past because once society gets organized in a particular way, this tends to persist.

 - ## 3. The Making of Prosperity and Poverty

   - South Korea was led, and its early economic and political institutions were shaped, by the Harvard-and Princeton-educated, staunchly anticommunist Syngman Rhee, with significant support from the United States. Rhee was elected president in 1948. Forged in the midst of the Korean War and against the threat of communism spreading to the south of the 38th parallel, South Korea was no democracy. Both Rhee and his equally famous successor, General Park Chung-Hee, secured their places in history as authoritarian presidents. But both governed a market economy where private property was recognized, and after 1961, Park effectively threw the weight of the state behind rapid economic growth, channeling credit and subsidies to firms that were successful.

   - Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.

   - Those in the North grow up in poverty, without entrepreneurial initiative, creativity, or adequate education to prepare them for skilled work. Much of the education they receive at school is pure propaganda, meant to shore up the legitimacy of the regime; there are few books, let alone computers. After finishing school, everyone has to go into the army for ten years. These teenagers know that they will not be able to own property, start a business, or become more prosperous even if many people engage illegally in private economic activities to make a living. They also know that they will not have legal access to markets where they can use their skills or their earnings to purchase the goods they need and desire. They are even unsure about what kind of human rights they will have.

   - Those in the South obtain a good education, and face incentives that encourage them to exert effort and excel in their chosen vocation. South Korea is a market economy, built on private property. South Korean teenagers know that, if successful as entrepreneurs or workers, they can one day enjoy the fruits of their investments and efforts; they can improve their standard of living and buy cars, houses, and health care.

   - THE CONTRAST OF South and North Korea, and of the United States and Latin America, illustrates a general principle. Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations. But such rights must exist for the majority of people in society.

   - Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society.

   - We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.

   - Those who have good ideas will be able to start businesses, workers will tend to go to activities where their productivity is greater, and less efficient firms can be replaced by more efficient ones. Contrast how people choose their occupations under inclusive markets to colonial Peru and Bolivia, where under the mita, many were forced to work in silver and mercury mines, regardless of their skills or whether they wanted to.

   - Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education.

   - This process of innovation is made possible by economic institutions that encourage private property, uphold contracts, create a level playing field, and encourage and allow the entry of new businesses that can bring new technologies to life. It should therefore be no surprise that it was U.S. society, not Mexico or Peru, that produced Thomas Edison, and that it was South Korea, not North Korea, that today produces technologically innovative companies such as Samsung and Hyundai.

   - The low education level of poor countries is caused by economic institutions that fail to create incentives for parents to educate their children and by political institutions that fail to induce the government to build, finance, and support schools and the wishes of parents and children. The price these nations pay for low education of their population and lack of inclusive markets is high. They fail to mobilize their nascent talent. They have many potential Bill Gateses and perhaps one or two Albert Einsteins who are now working as poor, uneducated farmers, being coerced to do what they don’t want to do or being drafted into the army, because they never had the opportunity to realize their vocation in life.

   - Politics is the process by which a society chooses the rules that will govern it.

   - Max Weber, who we met in the previous chapter, provided the most famous and widely accepted definition of the state, identifying it with the“monopoly of legitimate violence” in society. Without such a monopoly and the degree of centralization that it entails, the state cannot play its role as enforcer of law and order, let alone provide public services and encourage and regulate economic activity.

   - We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions.

   - Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power.

   - In Barbados or in Latin America, for example, the colonists were able to use their political power to impose a set of economic institutions that made them huge fortunes at the expense of the rest of the population. The resources these economic institutions generated enabled these elites to build armies and security forces to defend their absolutist monopoly of political power. The implication of course is that extractive political and economic institutions support each other and tend to persist.

   - Inclusive economic institutions, in turn, are forged on foundations laid by inclusive political institutions, which make power broadly distributed in society and constrain its arbitrary exercise. Such political institutions also make it harder for others to usurp power and undermine the foundations of inclusive institutions. Those controlling political power cannot easily use it to set up extractive economic institutions for their own benefit.

   - Similarly, inclusive economic institutions will neither support nor be supported by extractive political ones. Either they will be transformed into extractive economic institutions to the benefit of the narrow interests that hold power, or the economic dynamism they create will destabilize the extractive political institutions, opening the way for the emergence of inclusive political institutions.

   - Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth. But this means that the choice of institutions—that is, the politics of institutions—is central to our quest for understanding the reasons for the success and failure of nations.

   - Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.

   - European history provides a vivid example of the consequences of creative destruction. On the eve of the Industrial Revolution in the eighteenth century, the governments of most European countries were controlled by aristocracies and traditional elites, whose major source of income was from landholdings or from trading privileges they enjoyed thanks to monopolies granted and entry barriers imposed by monarchs. Consistent with the idea of creative destruction, the spread of industries, factories, and towns took resources away from the land, reduced land rents, and increased the wages that landowners had to pay their workers. These elites also saw the emergence of new businessmen and merchants eroding their trading privileges.

   - All in all, they were the clear economic losers from industrialization.

   - Urbanization and the emergence of a socially conscious middle and working class also challenged the political monopoly of landed aristocracies. So with the spread of the Industrial Revolution the aristocracies weren’t just the economic losers; they also risked becoming political losers, losing their hold on political power. With their economic and political power under threat, these elites often formed a formidable opposition against industrialization.

   - The aristocracy was not the only loser from industrialization. Artisans whose manual skills were being replaced by mechanization likewise opposed the spread of industry. Many organized against it, rioting and destroying the machines they saw as responsible for the decline of their livelihood. They were the Luddites, a word that has today become synonymous with resistance to technological change.

   - John Kay, English inventor of the“flying shuttle” in 1733, one of the first significant improvements in the mechanization of weaving, had his house burned down by Luddites in 1753. James Hargreaves, inventor of the“spinning jenny,” a complementary revolutionary improvement in spinning, got similar treatment.

   - In the Austro-Hungarian and the Russian empires, where the absolutist monarchs and aristocrats had far more to lose, industrialization was blocked. In consequence, the economies of Austria-Hungary and Russia stalled. They fell behind other European nations, where economic growth took off during the nineteenth century.

   - The success and failure of specific groups notwithstanding, one lesson is clear: powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded.

   - Conflict over scarce resources, income and power, translates into conflict over the rules of the game, the economic institutions, which will determine the economic activities and who will benefit from them. When there is a conflict, the wishes of all parties cannot be simultaneously met. Some will be defeated and frustrated, while others will succeed in securing outcomes they like.

   - Portuguese and Dutch visitors to Kongo in the fifteenth and sixteenth centuries remarked on the“miserable poverty” there. Technology was rudimentary by European standards, with the Kongolese having neither writing, the wheel, nor the plow. The reason for this poverty, and the reluctance of Kongolese farmers to adopt better technologies when they learned of them, is clear from existing historical accounts. It was due to the extractive nature of the country’s economic institutions.

   - But it 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. Instead of investing to increase their productivity and selling their products in markets, the Kongolese moved their villages away from the market; they were trying to be as far away from the roads as possible, in order to reduce the incidence of plunder and to escape the reach of slave traders.

   - The poverty of the Kongo was therefore the result of extractive economic institutions that blocked all the engines of prosperity or even made them work in reverse. The Kongo’s government provided very few public services to its citizens, not even basic ones, such as secure property rights or law and order.

   - Nevertheless, though“miserable poverty” was widespread, the Kongolese extractive institutions had their own impeccable logic: they made a few people, those with political power, very rich. In the sixteenth century, the king of Kongo and the aristocracy were able to import European luxury goods and were surrounded by servants and slaves.

   - What would have stopped the king from changing his mind later on? The only real guarantee would have been a change in political institutions so that citizens gained some countervailing political power, giving them some say over taxation or what the musketeers did. But in this case it is dubious that sustaining the consumption and lifestyle of the king and the elite would have been high on their list of priorities. In this scenario, changes that would have created better economic institutions in society would have made the king and aristocracy political as well as economic losers.

   - The modern Democratic Republic of Congo remains poor because its citizens still lack the economic institutions that create the basic incentives that make a society prosperous. It is not geography, culture, or the ignorance of its citizens or politicians that keep the Congo poor, but its extractive economic institutions. These are still in place after all these centuries because political power continues to be narrowly concentrated in the hands of an elite who have little incentive to enforce secure property rights for the people, to provide the basic public services that would improve the quality of life, or to encourage economic progress.

   - Congo today is an extreme example, with lawlessness and highly insecure property rights. However, in most cases such extremism would not serve the interest of the elite, since it would destroy all economic incentives and generate few resources to be extracted.

   - The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty. But this implies neither that extractive institutions can never generate growth nor that all extractive institutions are created equal.

   - Another example is the economic growth and industrialization of the Soviet Union from the first Five-Year Plan in 1928 until the 1970s. Political and economic institutions were highly extractive, and markets were heavily constrained. Nevertheless, the Soviet Union was able to achieve rapid economic growth because it could use the power of the state to move resources from agriculture, where they were very inefficiently used, into industry.

   - Alternatively, the historical situation could be such as to endow an extractive political regime with rather inclusive economic institutions, which they decide not to block. These provide the second way in which growth can take place under extractive political institutions.

   - The rapid industrialization of South Korea under General Park is an example. Park came to power via a military coup in 1961, but he did so in a society heavily supported by the United States and with an economy where economic institutions were essentially inclusive. Though Park’s regime was authoritarian, it felt secure enough to promote economic growth, and in fact did so very actively—perhaps partly because the regime was not directly supported by extractive economic institutions. Differently from the Soviet Union and most other cases of growth under extractive institutions, South Korea transitioned from extractive political institutions toward inclusive political institutions in the 1980s. This successful transition was due to a confluence of factors.

   - By the 1970s, economic institutions in South Korea had become sufficiently inclusive that they reduced one of the strong rationales for extractive political institutions—the economic elite had little to gain from their own or the military’s dominance of politics. The relative equality of income in South Korea also meant that the elite had less to fear from pluralism and democracy. The key influence of the United States, particularly given the threat from North Korea, also meant that the strong democracy movement that challenged the military dictatorship could not be repressed for long.

   - In consequence, Soviet growth ran out of steam, and the economy began to collapse in the 1980s and then totally fell apart in the 1990s.

   - As in the Soviet Union in its heyday, China is growing rapidly, but this is still growth under extractive institutions, under the control of the state, with little sign of a transition to inclusive political institutions. The fact that Chinese economic institutions are still far from fully inclusive also suggests that a South Korean–style transition is less likely, though of course not impossible.

   - A major dividing line between extractive political institutions is therefore their degree of political centralization. Those without it, such as many in sub-Saharan Africa, will find it difficult to achieve even limited growth.

   - For a while the state may be able to create rapid economic growth by allocating resources and people by fiat, but this process is intrinsically limited. When the limits are hit, growth stops, as it did in the Soviet Union in the 1970s. Even when the Soviets achieved rapid economic growth, there was little technological change in most of the economy, though by pouring massive resources into the military they were able to develop military technologies and even pull ahead of the United States in the space and nuclear race for a short while. But this growth without creative destruction and without broad-based technological innovation was not sustainable and came to an abrupt end.

   - In addition, the arrangements that support economic growth under extractive political institutions are, by their nature, fragile—they can collapse or can be easily destroyed by the infighting that the extractive institutions themselves generate.

   - In fact, extractive political and economic institutions create a general tendency for infighting, because they lead to the concentration of wealth and power in the hands of a narrow elite.

   - One implication of this is that even if a society under extractive institutions initially achieves some degree of state centralization, it will not last. In fact, the infighting to take control of extractive institutions often leads to civil wars and widespread lawlessness, enshrining a persistent absence of state centralization as in many nations in sub-Saharan Africa and some in Latin America and South Asia.

   - Finally, when growth comes under extractive political institutions but where economic institutions have inclusive aspects, as they did in South Korea, there is always the danger that economic institutions become more extractive and growth stops.

   - Those controlling political power will eventually find it more beneficial to use their power to limit competition, to increase their share of the pie, or even to steal and loot from others rather than support economic progress.

 - ## 4. Small Differences and Critical Junctures: The Weight of History

   - It was based on a hierarchical relationship between the king and the lords beneath him, with the peasants at the bottom. The king owned the land and he granted it to the lords in exchange for military services. The lords then allocated land to peasants, in exchange for which peasants had to perform extensive unpaid labor and were subject to many fines and taxes. Peasants, who because of their“servile” status were thus called serfs, were tied to the land, unable to move elsewhere without the permission of their lord, who was not just the landlord, but also the judge, jury, and police force.

   - The massive scarcity of labor created by the plague shook the foundations of the feudal order. It encouraged peasants to demand that things change. At Eynsham Abbey, for example, the peasants demanded that many of the fines and unpaid labor be reduced.

   - Particularly concerning for the English elite was“enticement,” the attempt by one lord to attract the scarce peasants of another. The solution was to make prison the punishment for leaving employment without permission of the employer: And if a reaper or mower, or other workman or servant, of whatever standing or condition he be, who is retained in the service of any one, do depart from the said service before the end of the term agreed, without permission or reasonable cause, he shall undergo the penalty of imprisonment, and let no one … moreover, pay or permit to be paid to any one more wages, livery, meed or salary than was customary as has been said.

   - The attempt by the English state to stop the changes of institutions and wages that came in the wake of the Black Death didn’t work. In 1381 the Peasants’ Revolt broke out, and the rebels, under the leadership of Wat Tyler, even captured most of London. Though they were ultimately defeated, and Tyler was executed, there were no more attempts to enforce the Statute of Laborers.

   - A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On the one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe.

   - The culmination of the institutional struggles of the sixteenth and seventeenth centuries were two landmark events: the English Civil War between 1642 and 1651, and particularly the Glorious Revolution of 1688.

   - The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions.

   - As a consequence, economic institutions also started becoming more inclusive. Neither slavery nor the severe economic restrictions of the feudal medieval period, such as serfdom, existed in England at the beginning of the seventeenth century. Nevertheless, there were many restrictions on economic activities people could engage in. Both the domestic and international economy were choked by monopolies. The state engaged in arbitrary taxation and manipulated the legal system. Most land was caught in archaic forms of property rights that made it impossible to sell and risky to invest in.

   - This changed after the Glorious Revolution. The government adopted a set of economic institutions that provided incentives for investment, trade, and innovation. It steadfastly enforced property rights, including patents granting property rights for ideas, thereby providing a major stimulus to innovation. It protected law and order. Historically unprecedented was the application of English law to all citizens. Arbitrary taxation ceased, and monopolies were abolished almost completely. The English state aggressively promoted mercantile activities and worked to promote domestic industry, not only by removing barriers to the expansion of industrial activity but also by lending the full power of the English navy to defend mercantile interests. By rationalizing property rights, it facilitated the construction of infrastructure, particularly roads, canals, and later railways, that would prove to be crucial for industrial growth.

   - It was the inclusive nature of markets that allowed people to allocate their talents to the right lines of business. It also relied on education and skills, for it was the relatively high levels of education, at least by the standards of the time, that enabled the emergence of entrepreneurs with the vision to employ new technologies for their businesses and to find workers with the skills to use them.

   - It is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution. The great inventors such as James Watt(perfecter of the steam engine), Richard Trevithick(the builder of the first steam locomotive), Richard Arkwright(the inventor of the spinning frame), and Isambard Kingdom Brunel(the creator of several revolutionary steamships) were able to take up the economic opportunities generated by their ideas, were confident that their property rights would be respected, and had access to markets where their innovations could be profitably sold and used.

   - The events leading up to the Glorious Revolution forged a broad and powerful coalition able to place durable constraints on the power of the monarchy and the executive, which were forced to be open to the demands of this coalition. This laid the foundations for pluralistic political institutions, which then enabled the development of economic institutions that would underpin the first Industrial Revolution.

   - World inequality dramatically increased with the British, or English, Industrial Revolution because only some parts of the world adopted the innovations and new technologies that men such as Arkwright and Watt, and the many who followed, developed.

   - Elizabeth I was far less financially independent, so she had to beg Parliament for more taxes. In exchange, Parliament demanded concessions, in particular restrictions on the right of Elizabeth to create monopolies. It was a conflict Parliament gradually won. In Spain the Cortes lost a similar conflict. Trade wasn’t just monopolized; it was monopolized by the Spanish monarchy.

   - The difference was that in England it was far more likely that the opponents to absolutism would prevail because they were relatively wealthy and more numerous than the opponents to absolutism in Spain and France.

   - No two societies create the same institutions; they will have distinct customs, different systems of property rights, and different ways of dividing a killed animal or loot stolen from another group. Some will recognize the authority of elders, others will not; some will achieve some degree of political centralization early on, but not others. Societies are constantly subject to economic and political conflict that is resolved in different ways because of specific historical differences, the role of individuals, or just random factors.

   - These differences are often small to start with, but they cumulate, creating a process of institutional drift. Just as two isolated populations of organisms will drift apart slowly in a process of genetic drift, because random genetic mutations cumulate, two otherwise similar societies will also slowly drift apart institutionally. Though, just like genetic drift, institutional drift has no predetermined path and does not even need to be cumulative; over centuries it can lead to perceptible, sometimes important differences.

   - The Atlantic seas were now open to the English on more equal terms. Without this unlikely victory for the English, the events that would create the transformative critical juncture and spawn the distinctively pluralistic political institutions of post-1688 England would never have got moving. Map 9 shows the trail of Spanish shipwrecks as the Armada was chased right around the British Isles. Of course, nobody in 1588 could foresee the consequences of the fortunate English victory. Few probably understood at the time that this would create a critical juncture leading up to a major political revolution a century later.

   - Some parts of the world developed institutions that were very close to those in England, though by a very different route. This was particularly true of some European“settler colonies” such as Australia, Canada, and the United States, though their institutions were just forming as the Industrial Revolution was getting under way. As we saw in chapter 1, a process starting with the foundation of the Jamestown colony in 1607 and culminating in the War of Independence and the enactment of the U.S. Constitution shares many of the same characteristics as the long struggle in England of Parliament against the monarchy, for it also led to a centralized state with pluralistic political institutions. The Industrial Revolution then spread rapidly to such countries.

   - The French Revolution was another critical juncture that led the institutions of Western Europe to converge with those of England, while Eastern Europe diverged further.

   - Argentina and Chile have, however, fared better than most other countries in the region. They had few indigenous people or mineral riches and were“neglected” while the Spanish focused on the lands occupied by the Aztec, Maya, and Incan civilizations. Not coincidentally, the poorest part of Argentina is the northwest, the only section of the country integrated into the Spanish colonial economy. Its persistent poverty, the legacy of extractive institutions, is similar to that created by the Potosí mita in Bolivia and Peru(this page–this page).

   - Kongolese absolutism transmogrified from completely dominating society, with extractive economic institutions that merely captured all the agricultural output of its citizens, to enslaving people en masse and selling them to the Portuguese in exchange for guns and luxury goods for the Kongolese elite.

   - There is a tendency to see historical events as the inevitable consequences of deep-rooted forces. While we place great emphasis on how the history of economic and political institutions creates vicious and virtuous circles, contingency, as we have emphasized in the context of the development of English institutions, can always be a factor. Seretse Khama, studying in England in the 1940s, fell in love with Ruth Williams, a white woman. As a result, the racist apartheid regime in South Africa persuaded the English government to ban him from the protectorate, then called Bechuanaland(whose administration was under the High Commissioner of South Africa), and he resigned his kingship. When he returned to lead the anticolonial struggle, he did so with the intention not of entrenching the traditional institutions but of adapting them to the modern world. Khama was an extraordinary man, uninterested in personal wealth and dedicated to building his country. Most other African countries have not been so fortunate. Both things mattered, the historical development of institutions in Botswana and contingent factors that led these to be built on rather than overthrown or distorted as they were elsewhere in Africa.

   - In India, institutional drift worked differently and led to the development of a uniquely rigid hereditary caste system that limited the functioning of markets and the allocation of labor across occupations much more severely than the feudal order in medieval Europe.

   - Most European countries had similar systems in the Middle Ages. Modern Anglo-Saxon surnames such as Baker, Cooper, and Smith are direct descendants of hereditary occupational categories. Bakers baked, coopers made barrels, and smiths forged metals. But these categories were never as rigid as Indian caste distinctions and gradually became meaningless as predictors of a person’s occupation.

   - But more often, collapses of rapid growth, such as in Argentina or the Soviet Union, are a consequence of growth under extractive institutions coming to an end. As we have seen, this can happen either because of infighting over the spoils of extraction, leading to the collapse of the regime, or because the inherent lack of innovation and creative destruction under extractive institutions puts a limit on sustained growth. How the Soviets ran hard into these limits will be discussed in greater detail in the next chapter.

 - ## 5. “I’ve seen the Future, and It Works”: Growth Under Extractive Institutions

   - “Soviet Russia,” he recalled in his 1931 autobiography,“was a revolutionary government with an evolutionary plan. Their plan was not to end evils such as poverty and riches, graft, privilege, tyranny, and war by direct action, but to seek out and remove their causes. They had set up a dictatorship, supported by a small, trained minority, to make and maintain for a few generations a scientific rearrangement of economic forces which would result in economic democracy first and political democracy last.”

   - When Steffens returned from his diplomatic mission he went to see his old friend the sculptor Jo Davidson and found him making a portrait bust of the wealthy financier Bernard Baruch.“So you’ve been over in Russia,” Baruch remarked. Steffens answered,“I have been over into the future, and it works.” He would perfect this adage into a form that went down in history:“I’ve seen the future, and it works.”

   - Economic growth Stalin style was simple: develop industry by government command and obtain the necessary resources for this by taxing agriculture at very high rates. The communist state did not have an effective tax system, so instead Stalin“collectivized” agriculture. This process entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Party. This made it much easier for Stalin to grab agricultural output and use it to feed all the people who were building and manning the new factories. The consequences of this for the rural folk were calamitous. The collective farms completely lacked incentives for people to work hard, so production fell sharply. So much of what was produced was extracted that there was not enough to eat.

   - Allowing people to make their own decisions via markets is the best way for a society to efficiently use its resources. When the state or a narrow elite controls all these resources instead, neither the right incentives will be created nor will there be an efficient allocation of the skills and talents of people. But in some instances the productivity of labor and capital may be so much higher in one sector or activity, such as heavy industry in the Soviet Union, that even a top-down process under extractive institutions that allocates resources toward that sector can generate growth.

   - In fact, between 1928 and 1960 national income grew at 6 percent a year, probably the most rapid spurt of economic growth in history up until then. This quick economic growth was not created by technological change, but by reallocating labor and by capital accumulation through the creation of new tools and factories.

   - As late as 1977, a leading academic textbook by an English economist argued that Soviet-style economies were superior to capitalist ones in terms of economic growth, providing full employment and price stability and even in producing people with altruistic motivation. Poor old Western capitalism did better only at providing political freedom. Indeed, the most widely used university textbook in economics, written by Nobel Prize–winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition there was little change in the analysis, though the two dates were delayed to 2002 and 2012.

   - By the 1970s, economic growth had all but stopped. The most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elites. In addition, once all the very inefficiently used resources had been reallocated to industry, there were few economic gains to be had by fiat. Then the Soviet system hit a roadblock, with lack of innovation and poor economic incentives preventing any further progress. The only area in which the Soviets did manage to sustain some innovation was through enormous efforts in military and aerospace technology. As a result they managed to put the first dog, Leika, and the first man, Yuri Gagarin, in space. They also left the world the AK-47 as one of their legacies.

   - Stalin himself said in 1937 that“only bureaucrats can think that planning work ends with the creation of the plan. The creation of the plan is just the beginning. The real direction of the plan develops only after the putting together of the plan.” Stalin wanted to maximize his discretion to reward people or groups who were politically loyal, and punish those who were not. As for Gosplan, its main role was to provide Stalin with information so he could better monitor his friends and enemies. It actually tried to avoid making decisions. If you made a decision that turned out badly, you might get shot. Better to avoid all responsibility.

   - An example of what could happen if you took your job too seriously, rather than successfully second-guessing what the Communist Party wanted, is provided by the Soviet census of 1937. As the returns came in, it became clear that they would show a population of about 162 million, far less than the 180 million Stalin had anticipated and indeed below the figure of 168 million that Stalin himself announced in 1934. The 1937 census was the first conducted since 1926, and therefore the first one that followed the mass famines and purges of the early 1930s. The accurate population numbers reflected this. Stalin’s response was to have those who organized the census arrested and sent to Siberia or shot. He ordered another census, which took place in 1939. This time the organizers got it right; they found that the population was actually 171 million.

   - Typically a firm under central planning had to meet an output target set under the plan, though such plans were often renegotiated and changed. From the 1930s, workers were paid bonuses if the output levels were attained. These could be quite high—for instance, as much as 37 percent of the wage for management or senior engineers. But paying such bonuses created all sorts of disincentives to technological change. For one thing, innovation, which took resources away from current production, risked the output targets not being met and the bonuses not being paid. For another, output targets were usually based on previous production levels. This created a huge incentive never to expand output, since this only meant having to produce more in the future, since future targets would be“ratcheted up.” Underachievement was always the best way to meet targets and get the bonus. The fact that bonuses were paid monthly also kept everyone focused on the present, while innovation is about making sacrifices today in order to have more tomorrow.

   - Central planning was just not good at replacing what the great eighteenth-century economist Adam Smith called the“invisible hand” of the market. When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from ceilings.

   - Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value. To more specifically create incentives for innovation, the Soviet Union introduced explicit innovation bonuses in 1946. As early as 1918, the principle had been recognized that an innovator should receive monetary rewards for his innovation, but the rewards set were small and unrelated to the value of the new technology.

   - This changed only in 1956, when it was stipulated that the bonus should be proportional to the productivity of the innovation. However, since productivity was calculated in terms of economic benefits measured using the existing system of prices, this was again not much of an incentive to innovate. One could fill many pages with examples of the perverse incentives these schemes generated. For example, because the size of the innovation bonus fund was limited by the wage bill of a firm, this immediately reduced the incentive to produce or adopt any innovation that might have economized on labor.

   - A whole set of laws created criminal offenses for workers who were perceived to be shirking. In June 1940, for example, a law made absenteeism, defined as any twenty minutes unauthorized absence or even idling on the job, a criminal offense that could be punished by six months’ hard labor and a 25 percent cut in pay. All sorts of similar punishments were introduced, and were implemented with astonishing frequency. Between 1940 and 1955, 36 million people, about one-third of the adult population, were found guilty of such offenses. Of these, 15 million were sent to prison and 250,000 were shot. In any year, there would be 1 million adults in prison for labor violations; this is not to mention the 2.5 million people Stalin exiled to the gulags of Siberia. Still, it didn’t work.

   - Though you can move someone to a factory, you cannot force people to think and have good ideas by threatening to shoot them.

   - The fact that truly effective incentives could not be introduced in the centrally planned economy was not due to technical mistakes in the design of the bonus schemes. It was intrinsic to the whole method by which extractive growth had been achieved. It had been done by government command, which could solve some basic economic problems. But stimulating sustained economic growth required that individuals use their talent and ideas, and this could never be done with a Soviet-style economic system. The rulers of the Soviet Union would have had to abandon extractive economic institutions, but such a move would have jeopardized their political power. Indeed, when Mikhail Gorbachev started to move away from extractive economic institutions after 1987, the power of the Communist Party crumbled, and with it, the Soviet Union.

   - THE SOVIET UNION was able to generate rapid growth even under extractive institutions because the Bolsheviks built a powerful centralized state and used it to allocate resources toward industry. But as in all instances of growth under extractive institutions, this experience did not feature technological change and was not sustained. Growth first slowed down and then totally collapsed. Though ephemeral, this type of growth still illustrates how extractive institutions can stimulate economic activity.

   - Throughout history most societies have been ruled by extractive institutions, and those that have managed to impose some extent of order over the countries have been able to generate some limited growth—even if none of these extractive societies have managed to achieve sustained growth. In fact, some of the major turning points in history are characterized by institutional innovations that cemented extractive institutions and increased the authority of one group to impose law and order and benefit from extraction.

   - Douglas argued,“[ T] he absence of nets is consistent with a general Lele tendency not to invest time and labor in long-term equipment.”

   - This political revolution introducing state centralization and law and order in the Kuba country in turn led to an economic revolution. Agriculture was reorganized and new technologies were adopted to increase productivity. The crops that had previously been the staples were replaced by new, higher-yield ones from the Americas(in particular, maize, cassava, and chili peppers). The intense mixed-farming cycle was introduced at this time, and the amount of food produced per capita doubled. To adopt these crops and reorganize the agricultural cycle, more hands were needed in the fields. So the age of marriage was lowered to twenty, which brought men into the agricultural labor force at a younger age. The contrast with the Lele is stark. Their men tended to marry at thirty-five and only then worked in the fields. Until then, they dedicated their lives to fighting and raiding. The connection between the political and economic revolution was simple.

   - While Shyaam and his men did not introduce inclusive institutions to the eastern bank of the Kasai, some amount of economic prosperity is intrinsic to extractive institutions that achieve some degree of state centralization and impose law and order. Encouraging economic activity was of course in the interest of Shyaam and his men, as otherwise there would have been nothing to extract. Just like Stalin, Shyaam created by command a set of institutions that would generate the wealth necessary to support this system. Compared to the utter absence of law and order that reigned on the other bank of the Kasai, this generated significant economic prosperity—even if much of it was likely extracted by Shyaam and his elites. But it was necessarily limited. Just as in the Soviet Union, there was no creative destruction in the Kuba Kingdom and no technological innovation after this initial change. This situation was more or less unaltered by the time the kingdom was first encountered by Belgian colonial officials in the late nineteenth century.

   - KING SHYAAM’S ACHIEVEMENT illustrates how some limited degree of economic success can be achieved through extractive institutions. Creating such growth requires a centralized state. To centralize the state, a political revolution is often necessary. Once Shyaam created this state, he could use its power to reorganize the economy and boost agricultural productivity, which he could then tax.

   - There is a fundamental difference between farming and herding and hunting-gathering. The former is based on the domestication of plant and animal species, with active intervention in their life cycles to change genetics to make those species more useful to humans. Domestication is a technological change that enables humans to produce a lot more food from the available plants and animals. The domestication of maize, for example, began when humans gathered teosinte, the wild crop that was maize’s ancestor. Teosinte cobs are very small, barely a few centimeters long. They are dwarfed by a cob of modern maize. Yet gradually, by selecting the larger ears of teosinte, and plants whose ears did not break but stayed on the stalk to be harvested, humans created modern maize, a crop that provides far more nourishment from the same piece of land.

   - In order for sedentary life to emerge, it therefore seems plausible that hunter-gatherers would have had to be forced to settle down, and this would have to have been preceded by an institutional innovation concentrating power in the hands of a group that would become the political elite, enforce property rights, maintain order, and also benefit from their status by extracting resources from the rest of society. In fact, a political revolution similar to that initiated by King Shyaam, even if on a smaller scale, is likely to have been the breakthrough that led to sedentary life.

   - One compelling piece of evidence for such hierarchy and inequality comes from Natufian graves. Some people were buried with large amounts of obsidian and dentalium shells, which came from the Mediterranean coast near Mount Carmel. Other types of ornamentation include necklaces, garters, and bracelets, which were made out of canine teeth and deer phalanges as well as shells. Other people were buried without any of these things. Shells and also obsidian were traded, and control of this trade was quite likely a source of power accumulation and inequality. Further evidence of economic and political inequality comes from the Natufian site of Ain Mallaha, just north of the Sea of Galilee. Amid a group of about fifty round huts and many pits, clearly used for storage, there is a large, intensively plastered building close to a cleared central place. This building was almost certainly the house of a chief.

   - Even technological innovation doesn’t necessarily lead to increased agricultural production. In fact, it is known that a major technological innovation, the introduction of the steel axe among the group of Australian Aboriginal peoples known as Yir Yoront, led not to more intense production but to more sleeping, because it allowed subsistence requirements to be met more easily, with little incentive to work for more.

   - But whether this happened in a particular place was not determined by the availability of plant and animal species. Instead, it was a consequence of the society’s having experienced the types of institutional, social, and political innovations that would have allowed sedentary life and then farming to emerge.

   - For every elite benefiting from extraction there is a non-elite who would love to replace him. Sometimes infighting simply replaces one elite with another. Sometimes it destroys the whole extractive society, unleashing a process of state and societal collapse, as the spectacular civilization that Maya city-states built more than one thousand years ago experienced.

   - The Mayas were skilled builders who independently invented cement. Their buildings and their inscriptions provide vital information on the trajectories of the Maya cities, as they often recorded events dated according to the Long Count. Looking across all the Maya cities, archaeologists can thus count how many buildings were finished in particular years. Around AD 500 there are few dated monuments. For example, the Long Count date corresponding to AD 514 recorded just ten. There was then a steady increase, reaching twenty by AD 672 and forty by the middle of the eighth century.

   - The basis for the economic development of the Maya Classical Era was the same as that for the Bushong and the Natufians: the creation of extractive institutions with some degree of state centralization. These institutions had several key elements. Around AD 100, in the city of Tikal in Guatemala, there emerged a new type of dynastic kingdom.

   - A ruling class based on the ajaw(lord or ruler) took root with a king called the k’uhul ajaw(divine lord) and, underneath him, a hierarchy of aristocrats. The divine lord organized the society with the cooperation of these elites and also communicated with the gods. As far as we know, this new set of political institutions did not allow for any sort of popular participation, but it did bring stability. The k’uhul ajaw raised tribute from farmers and organized labor to build the great monuments, and the coalescence of these institutions created the basis for an impressive economic expansion. The Maya’s economy was based on extensive occupational specialization, with skilled potters, weavers, woodworkers, and tool and ornament makers. They also traded obsidian, jaguar pelts, marine shells, cacao, salt, and feathers among themselves and other polities over long distances in Mexico. They probably had money, too, and like the Aztecs, used cacao beans for currency.

   - The new political institutions led to a significant increase in economic prosperity, much of which was then extracted by the new elite based around the k’uhul ajaw. Once this system had consolidated, by around AD 300, there was little further technological change, however. Though there is some evidence of improved irrigation and water management techniques, agricultural technology was rudimentary and appears not to have changed. Building and artistic techniques became much more sophisticated over time, but in total there was little innovation.

   - The extractive institutions upon which this narrow elite ruled created extensive inequality, and thus the potential for infighting between those who could benefit from the wealth extracted from the people. This conflict ultimately led to the undoing of the Maya civilization.

   - In the Caribbean plantation economies, extractive institutions took the form of the elite using coercion to force slaves to produce sugar. In the Soviet Union, they took the form of the Communist Party reallocating resources from agriculture to industry and structuring some sort of incentives for managers and workers. As we have seen, such incentives were undermined by the nature of the system.

   - By their very nature, extractive institutions do not foster creative destruction and generate at best only a limited amount of technological progress. The growth they engender thus lasts for only so long. The Soviet experience gives a vivid illustration of this limit. Soviet Russia generated rapid growth as it caught up rapidly with some of the advanced technologies in the world, and resources were allocated out of the highly inefficient agricultural sector and into industry. But ultimately the incentives faced in every sector, from agriculture to industry, could not stimulate technological progress. This took place in only a few pockets where resources were being poured and where innovation was strongly rewarded because of its role in the competition with the West. Soviet growth, however rapid it was, was bound to be relatively short lived, and it was already running out of steam by the 1970s.

   - As these institutions create significant gains for the elite, there will be strong incentives for others to fight to replace the current elite. Infighting and instability are thus inherent features of extractive institutions, and they not only create further inefficiencies but also often reverse any political centralization, sometimes even leading to the total breakdown of law and order and descent into chaos, as the Maya city-states experienced following their relative success during their Classical Era.

   - Though inherently limited, growth under extractive institutions may nonetheless appear spectacular when it’s in motion. Many in the Soviet Union and many more in the Western world were awestruck by Soviet growth in the 1920s, ’30s, ’40s, ’50s, ’60s, and even as late as the ’70s, in the same way that they are mesmerized by the breakneck pace of economic growth in China today. But as we will discuss in greater detail in chapter 15, China under the rule of the Communist Party is another example of society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.

 - ## 6. Drifting Apart

   - One of the key bases for the economic expansion of Venice was a series of contractual innovations making economic institutions much more inclusive. The most famous was the commenda, a rudimentary type of joint stock company, which formed only for the duration of a single trading mission. A commenda involved two partners, a“sedentary” one who stayed in Venice and one who traveled. The sedentary partner put capital into the venture, while the traveling partner accompanied the cargo. Typically, the sedentary partner put in the lion’s share of the capital. Young entrepreneurs who did not have wealth themselves could then get into the trading business by traveling with the merchandise. It was a key channel of upward social mobility. Any losses in the voyage were shared according to the amount of capital the partners had put in. If the voyage made money, profits were based on two types of commenda contracts. If the commenda was unilateral, then the sedentary merchant provided 100 percent of the capital and received 75 percent of the profits. If it was bilateral, the sedentary merchant provided 67 percent of the capital and received 50 percent of the profits. Studying official documents, one sees how powerful a force the commenda was in fostering upward social mobility: these documents are full of new names, people who had previously not been among the Venetian elite. In government documents of AD 960, 971, and 982, the number of new names comprise 69 percent, 81 percent, and 65 percent, respectively, of those recorded.

   - After 1032 the doge was elected along with a newly created Ducal Council, whose job was also to ensure that the doge did not acquire absolute power. The first doge hemmed in by this council, Domenico Flabianico, was a wealthy silk merchant from a family that had not previously held high office. This institutional change was followed by a huge expansion of Venetian mercantile and naval power. In 1082 Venice was granted extensive trade privileges in Constantinople, and a Venetian Quarter was created in that city. It soon housed ten thousand Venetians. Here we see inclusive economic and political institutions beginning to work in tandem.

   - The economic expansion of Venice, which created more pressure for political change, exploded after the changes in political and economic institutions that followed the murder of the doge in 1171. The first important innovation was the creation of a Great Council, which was to be the ultimate source of political power in Venice from this point on. The council was made up of officeholders of the Venetian state, such as judges, and was dominated by aristocrats. In addition to these officeholders, each year a hundred new members were nominated to the council by a nominating committee whose four members were chosen by lot from the existing council.

   - The second innovation was the creation of yet another council, chosen by the Great Council by lot, to nominate the doge. Though the choice had to be ratified by the General Assembly, since they nominated only one person, this effectively gave the choice of doge to the council. The third innovation was that a new doge had to swear an oath of office that circumscribed ducal power. Over time these constraints were continually expanded so that subsequent doges had to obey magistrates, then have all their decisions approved by the Ducal Council. The Ducal Council also took on the role of ensuring that the doge obeyed all decisions of the Great Council.

   - These political reforms led to a further series of institutional innovations: in law, the creation of independent magistrates, courts, a court of appeals, and new private contract and bankruptcy laws. These new Venetian economic institutions allowed the creation of new legal business forms and new types of contracts. There was rapid financial innovation, and we see the beginnings of modern banking around this time in Venice. The dynamic moving Venice toward fully inclusive institutions looked unstoppable.

   - But there was a tension in all this. Economic growth supported by the inclusive Venetian institutions was accompanied by creative destruction.

   - Each new wave of enterprising young men who became rich via the commenda or other similar economic institutions tended to reduce the profits and economic success of established elites. And they did not just reduce their profits; they also challenged their political power. Thus there was always a temptation, if they could get away with it, for the existing elites sitting in the Great Council to close down the system to these new people.

   - From then on there was to be automatic confirmation of a person if his fathers and grandfathers had served on the council. Otherwise, confirmation was required by the Ducal Council. On October 17 another change in the rules was passed stipulating that an appointment to the Great Council must be approved by the Council of Forty, the doge, and the Ducal Council.

   - After September 11, 1298, current members and their families no longer needed confirmation. The Great Council was now effectively sealed to outsiders, and the initial incumbents had become a hereditary aristocracy. The seal on this came in 1315, with the Libro d’Oro, or“Gold Book,” which was an official registry of the Venetian nobility.

   - Most important, they banned the use of commenda contracts, one of the great institutional innovations that had made Venice rich. This shouldn’t be a surprise: the commenda benefited new merchants, and now the established elite was trying to exclude them. This was just one step toward more extractive economic institutions. Another step came when, starting in 1314, the Venetian state began to take over and nationalize trade. It organized state galleys to engage in trade and, from 1324 on, began to charge individuals high levels of taxes if they wanted to engage in trade. Long-distance trade became the preserve of the nobility. This was the beginning of the end of Venetian prosperity.

   - Venice went from economic powerhouse to museum.

   - It was upon this feudal foundation that the Black Death would create havoc and further strengthen independent cities and peasants at the expense of monarchs, aristocrats, and large landowners. And it was on this canvas that the opportunities created by the Atlantic trade would play out. Many parts of the world did not undergo these changes, and in consequence drifted apart.

   - What pitted Tiberius against these powerful senators was his willingness to stand against them in a crucial question of the day: the allocation of land and the rights of plebeians, common Roman citizens.

   - Their power had been forged by“secession,” a form of strike by plebeians, particularly soldiers, who would withdraw to a hill outside the city and refuse to cooperate with the magistrates until their complaints were dealt with. This threat was of course particularly important during a time of war. It was supposedly during such a secession in the fifth century BC that citizens gained the right to elect their tribune and enact laws that would govern their community. Their political and legal protection, even if limited by our current standards, created economic opportunities for citizens and some degree of inclusivity in economic institutions. As a result, trade throughout the Mediterranean flourished under the Roman Republic.

   - Rome’s armies during the Republic consisted of citizen-soldiers who were small landowners, first in Rome and later in other parts of Italy. Traditionally they fought in the army when necessary and then returned to their plots. As Rome expanded and the campaigns got longer, this model ceased to work. Soldiers were away from their plots for years at a time, and many landholdings fell into disuse. The soldiers’ families sometimes found themselves under mountains of debt and on the brink of starvation. Many of the plots were therefore gradually abandoned, and absorbed by the estates of the senators. As the senatorial class got richer and richer, the large mass of landless citizens gathered in Rome, often after being decommissioned from the army. With no land to return to, they sought work in Rome. By the late second century BC, the situation had reached a dangerous boiling point, both because the gap between rich and poor had widened to unprecedented levels and because there were hordes of discontented citizens in Rome ready to rebel in response to these injustices and turn against the Roman aristocracy. But political power rested with the rich landowners of the senatorial class, who were the beneficiaries of the changes that had gone on over the last two centuries. Most had no intention of changing the system that had served them so well.

   - Instead of a political voice, Roman citizens now had free handouts of wheat and, subsequently, olive oil, wine, and pork, and were kept entertained by circuses and gladiatorial contests. With Augustus’s reforms, emperors began to rely not so much on the army made up of citizen-soldiers, but on the Praetorian Guard, the elite group of professional soldiers created by Augustus. The Guard itself would soon become an important independent broker of who would become emperor, often through not peaceful means but civil wars and intrigue. Augustus also strengthened the aristocracy against common Roman citizens, and the growing inequality that had underpinned the conflict between Tiberius Gracchus and the aristocrats continued, perhaps even strengthened.

   - The experience of economic growth during the Roman Republic was impressive, as were other examples of growth under extractive institutions, such as the Soviet Union. But that growth was limited and was not sustained, even when it is taken into account that it occurred under partially inclusive institutions. Growth was based on relatively high agricultural productivity, significant tribute from the provinces, and long-distance trade, but it was not underpinned by technological progress or creative destruction. The Romans inherited some basic technologies, iron tools and weapons, literacy, plow agriculture, and building techniques. Early on in the Republic, they created others: cement masonry, pumps, and the water wheel. But thereafter, technology was stagnant throughout the period of the Roman Empire.

   - As property rights became more insecure and the economic rights of citizens followed the decline of their political rights, economic growth likewise declined.

   - This is good news, until the government decides that it is not interested in technological development—an all-too-common occurrence due to the fear of creative destruction.

   - During the reign of the emperor Tiberius, a man invented unbreakable glass and went to the emperor anticipating that he would get a great reward. He demonstrated his invention, and Tiberius asked him if he had told anyone else about it. When the man replied no, Tiberius had the man dragged away and killed,“lest gold be reduced to the value of mud.”

   - First, the man went to Tiberius in the first place for a reward, rather than setting himself up in business and making a profit by selling the glass. This shows the role of the Roman government in controlling technology. Second, Tiberius was happy to destroy the innovation because of the adverse economic effects it would have had. This is the fear of the economic effects of creative destruction.

   - There is also direct evidence from the period of the Empire of the fear of the political consequences of creative destruction. Suetonius tells how the emperor Vespasian, who ruled between AD 69 and 79, was approached by a man who had invented a device for transporting columns to the Capitol, the citadel of Rome, at a relatively small cost. Columns were large, heavy, and very difficult to transport. Moving them to Rome from the mines where they were made involved the labor of thousands of people, at great expense to the government. Vespasian did not kill the man, but he also refused to use the innovation, declaring,“How will it be possible for me to feed the populace?” Again an inventor came to the government. Perhaps this was more natural than with the unbreakable glass, as the Roman government was most heavily involved with column mining and transportation. Again the innovation was turned down because of the threat of creative destruction, not so much because of its economic impact, but because of fear of political creative destruction. Vespasian was concerned that unless he kept the people happy and under control it would be politically destabilizing. The Roman plebeians had to be kept busy and pliant, so it was good to have jobs to give them, such as moving columns about. This complemented the bread and circuses, which were also dispensed for free to keep the population content. It is perhaps telling that both of these examples came soon after the collapse of the Republic. The Roman emperors had far more power to block change than the Roman rulers during the Republic.

   - Many citizens in Rome did not need to work: they lived off the handouts from the government. Where was innovation to come from? We have argued that innovation comes from new people with new ideas, developing new solutions to old problems. In Rome the people doing the producing were slaves and, later, semi-servile coloni with few incentives to innovate, since it was their masters, not they, who stood to benefit from any innovation. As we will see many times in this book, economies based on the repression of labor and systems such as slavery and serfdom are notoriously noninnovative. This is true from the ancient world to the modern era. In the United States, for example, the northern states took part in the Industrial Revolution, not the South. Of course slavery and serfdom created huge wealth for those who owned the slaves and controlled the serfs, but it did not create technological innovation or prosperity for society.

   - Despite such an inauspicious history, it was in England that the first truly inclusive society emerged and where the Industrial Revolution got under way. We argued earlier(this page–this page) that this was the result of a series of interactions between small institutional differences and critical junctures—for example, the Black Death and the discovery of the Americas.

   - How the Atlantic trade led to sharply divergent paths between Western Europe and Africa is yet another example of institutional divergence resulting from the interaction between critical junctures and existing institutional differences. While in England the profits of the slave trade helped to enrich those who opposed absolutism, in Africa they helped to create and strengthen absolutism.

   - It was in these places that early forms of extractive growth took place, as we have seen in the Maya city-states. But in the same way that big breakthroughs toward inclusive institutions and industrial growth in Europe did not come in places where the Roman world had the strongest hold, inclusive institutions in the Americas did not develop in the lands of these early civilizations. In fact, as we saw in chapter 1, these densely settled civilizations interacted in a perverse way with European colonialism to create a“reversal of fortune,” making the places that were previously relatively wealthy in the Americas relatively poor. Today it is the United States and Canada, which were then far behind the complex civilizations in Mexico, Peru, and Bolivia, that are much richer than the rest of the Americas.

   - The long period between the Neolithic Revolution, which started in 9500 BC, and the British Industrial Revolution of the late eighteenth century is littered with spurts of economic growth. These spurts were triggered by institutional innovations that ultimately faltered. In Ancient Rome the institutions of the Republic, which created some degree of economic vitality and allowed for the construction of a massive empire, unraveled after the coup of Julius Caesar and the construction of the empire under Augustus. It took centuries for the Roman Empire finally to vanish, and the decline was drawn out; but once the relatively inclusive republican institutions gave way to the more extractive institutions of the empire, economic regress became all but inevitable.

   - The Venetian dynamics were similar. The economic prosperity of Venice was forged by institutions that had important inclusive elements, but these were undermined when the existing elite closed the system to new entrants and even banned the economic institutions that had created the prosperity of the republic.

   - Out of the ashes of the Black Death emerged stronger towns and cities, and a peasantry no longer tied to the land and newly free of feudal obligations. It was precisely these critical junctures unleashed by the fall of the Roman Empire that led to a strong institutional drift affecting all of Europe in a way that has no parallel in sub-Saharan Africa, Asia, or the Americas.

 - ## 7. The Turning Point

   - Finally, in 1589, his“stocking frame” knitting machine was ready. He traveled to London with excitement to seek an interview with Elizabeth I to show her how useful the machine would be and to ask her for a patent that would stop other people from copying the design. He rented a building to set the machine up and, with the help of his local member of Parliament Richard Parkyns, met Henry Carey, Lord Hundson, a member of the Queen’s Privy Council. Carey arranged for Queen Elizabeth to come see the machine, but her reaction was devastating. She refused to grant Lee a patent, instead observing,“Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.” Crushed, Lee moved to France to try his luck there; when he failed there, too, he returned to England, where he asked James I(1603–1625), Elizabeth’s successor, for a patent. James I also refused, on the same grounds as Elizabeth. Both feared that the mechanization of stocking production would be politically destabilizing. It would throw people out of work, create unemployment and political instability, and threaten royal power. The stocking frame was an innovation that promised huge productivity increases, but it also promised creative destruction.

   - THE REACTION TO LEE’S brilliant invention illustrates a key idea of this book. The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.

   - For sustained economic growth we need new technologies, new ways of doing things, and more often than not they will come from newcomers such as Lee. It may make society prosperous, but the process of creative destruction that it initiates threatens the livelihood of those who work with old technologies, such as the hand-knitters who would have found themselves unemployed by Lee’s technology. More important, major innovations such as Lee’s stocking frame machine also threaten to reshape political power. Ultimately it was not concern about the fate of those who might become unemployed as a result of Lee’s machine that led Elizabeth I and James I to oppose his patent; it was their fear that they would become political losers—their concern that those displaced by the invention would create political instability and threaten their own power.

   - However, in opposition to this force, the centralization of state institutions can also mobilize demand for a nascent form of pluralism, as it did in Tudor England. When the barons and local elites recognize that political power will be increasingly more centralized and that this process is hard to stop, they will make demands to have a say in how this centralized power is used. In England during the late fifteenth and sixteenth centuries, this meant greater efforts by these groups to have Parliament as a counterweight against the Crown and to partially control the way the state functioned. Thus the Tudor project not only initiated political centralization, one pillar of inclusive institutions, but also indirectly contributed to pluralism, the other pillar of inclusive institutions.

   - The pattern of conflicts reflected the struggle over economic and political institutions. Parliament wanted an end to absolutist political institutions; the king wanted them strengthened. These conflicts were rooted in economics. Many supported the Crown because they had been granted lucrative monopolies. For example, the local monopolies controlled by the rich and powerful merchants of Shrewsbury and Oswestry were protected by the Crown from competition by London merchants. These merchants sided with Charles I. On the other side, the metallurgical industry had flourished around Birmingham because monopolies were weak there and newcomers to the industry did not have to serve a seven-year apprenticeship, as they did in other parts of the country. During the Civil War, they made swords and produced volunteers for the parliamentary side. Similarly, the lack of guild regulation in the county of Lancashire allowed for the development before 1640 of the“New Draperies,” a new style of lighter cloth. The area where the production of these cloths was concentrated was the only part of Lancashire to support Parliament.

   - This made a huge difference, because the interests of Parliament were very different from those of the Stuart kings. Since many of those in Parliament had important investments in trade and industry, they had a strong stake in enforcing property rights. The Stuarts had frequently infringed on property rights; now they would be upheld. Moreover, when the Stuarts controlled how the government spent money, Parliament opposed greater taxes and balked at strengthening the power of the state. Now that Parliament itself controlled spending, it was happy to raise taxes and spend the money on activities that it deemed valuable. Chief among them was the strengthening of the navy, which would protect the overseas mercantile interests of many of the members of Parliament.

   - But there were other ways to influence Parliament and thus economic institutions. The most important was via petitioning, and this was much more significant than the limited extent of democracy for the emergence of pluralism after the Glorious Revolution. Anybody could petition Parliament, and petition they did. Significantly, when people petitioned, Parliament listened. It is this more than anything that reflects the defeat of absolutism, the empowerment of a fairly broad segment of society, and the rise of pluralism in England after 1688.

   - Redistributing the tax burden was not the only pro-manufacturing policy that Parliament supported. A whole series of acts and legislations that would expand the market and the profitability of woolen textiles was passed. This all made political sense, since many of the parliamentarians who opposed James were heavily invested in these nascent manufacturing enterprises. Parliament also passed legislation that allowed for a complete reorganization of property rights in land, permitting the consolidation and elimination of many archaic forms of property and user rights.

   - The English textile industry not only was the driving force behind the Industrial Revolution but also revolutionized the world economy. English exports, led by cotton textiles, doubled between 1780 and 1800. It was the growth in this sector that pulled ahead the whole economy. The combination of technological and organizational innovation provides the model for economic progress that transformed the economies of the world that became rich.

   - Early innovators in building canals were men such as James Brindley, who was employed by the Duke of Bridgewater to build the Bridgewater Canal, which ended up linking the key industrial city of Manchester to the port of Liverpool. Born in rural Derbyshire, Brindley was a millwright by profession. His reputation for finding creative solutions to engineering problems came to the attention of the duke. He had no previous experience with transportation problems, which also was true of other great canal engineers such as Thomas Telford, who started life as a stonemason, or John Smeaton, an instrument maker and engineer. Just as the great canal engineers had no previous connection to transportation, neither did the great road and railway engineers. John McAdam, who invented tarmac around 1816, was the second son of a minor aristocrat. The first steam train was built by Richard Trevithick in 1804. Trevithick’s father was involved in mining in Cornwall, and Richard entered the same business at an early age, becoming fascinated by steam engines used for pumping out the mines. More significant were the innovations of George Stephenson, the son of illiterate parents and the inventor of the famous train“The Rocket,” who began work as an engineman at a coal mine.

   - It was the Glorious Revolution that strengthened and rationalized property rights, improved financial markets, undermined state-sanctioned monopolies in foreign trade, and removed the barriers to the expansion of industry. It was the Glorious Revolution that made the political system open and responsive to the economic needs and aspirations of society. These inclusive economic institutions gave men of talent and vision such as James Watt the opportunity and incentive to develop their skills and ideas and influence the system in ways that benefited them and the nation. Naturally these men, once they had become successful, had the same urges as any other person. They wanted to block others from entering their businesses and competing against them and feared the process of creative destruction that might put them out of business, as they had previously bankrupted others. But after 1688 this became harder to accomplish. In 1775 Richard Arkwright took out an encompassing patent that he hoped would give him a monopoly on the rapidly expanding cotton spinning industry in the future. He could not get the courts to enforce it.

   - This drift of institutions now interacted with another critical juncture caused by the massive expansion of trade into the Atlantic. As we saw in chapter 4, one crucial way in which this influenced future institutional dynamics depended on whether or not the Crown was able to monopolize this trade. In England the somewhat greater power of Parliament meant that the Tudor and Stuart monarchs could not do so. This created a new class of merchants and businessmen, who aggressively opposed the plan to create absolutism in England. By 1686 in London, for example, there were 702 merchants exporting to the Caribbean and 1,283 importing. North America had 691 exporting and 626 importing merchants. They employed warehousemen, sailors, captains, dockworkers, clerks—all of whom broadly shared their interests. Other vibrant ports, such as Bristol, Liverpool, and Portsmouth, were similarly full of such merchants. These new men wanted and demanded different economic institutions, and as they got wealthier through trade, they became more powerful. The same forces were at work in France, Spain, and Portugal. But there the kings were much more able to control trade and its profits. The type of new group that was to transform England did emerge in those countries, but was considerably smaller and weaker.

   - So the expanding trade opportunities presented by the Americas, the mass entry of English merchants into this trade and the economic development of the colonies, and the fortunes they made in the process, tipped the balance of power in the struggle between the monarchy and those opposed to absolutism.

   - A broad coalition meant that there would be greater demands for the creation of pluralist political institutions. Without some sort of pluralism, there would be a danger that one of the diverse interests would usurp power at the expense of the rest. The fact that Parliament after 1688 represented such a broad coalition was a crucial factor in making members of Parliament listen to petitions, even when they came from people outside of Parliament and even from those without a vote. This was a crucial factor in preventing attempts by one group to create a monopoly at the expense of the rest, as wool interests tried to do before the Manchester Act.

   - Thus this broad coalition was essential in the lead-up to a strong Parliament after 1688, but it also meant that there were checks within Parliament against any single group becoming too powerful and abusing its power. It was the critical factor in the emergence of pluralistic political institutions. The empowerment of such a broad coalition also played an important role in the persistence and strengthening of these inclusive economic and political institutions, as we will see in chapter 11.

 - ## 8. Not on Our Turf: Barriers to Development

   - This opposition to the printing press had the obvious consequences for literacy, education, and economic success. In 1800 probably only 2 to 3 percent of the citizens of the Ottoman Empire were literate, compared with 60 percent of adult males and 40 percent of adult females in England. In the Netherlands and Germany, literacy rates were even higher. The Ottoman lands lagged far behind the European countries with the lowest educational attainment in this period, such as Portugal, where probably only around 20 percent of adults could read and write.

   - Given the highly absolutist and extractive Ottoman institutions, the sultan’s hostility to the printing press is easy to understand. Books spread ideas and make the population much harder to control. Some of these ideas may be valuable new ways to increase economic growth, but others may be subversive and challenge the existing political and social status quo. Books also undermine the power of those who control oral knowledge, since they make that knowledge readily available to anyone who can master literacy. This threatened to undermine the existing status quo, where knowledge was controlled by elites. The Ottoman sultans and religious establishment feared the creative destruction that would result. Their solution was to forbid printing.

   - As we argued earlier, without a centralized state to provide order and enforce rules and property rights, inclusive institutions could not emerge. We will see in this chapter that in many parts of sub-Saharan Africa(for example, Somalia and southern Sudan) a major barrier to industrialization was the lack of any form of political centralization. Without these natural prerequisites, industrialization had no chance of getting off the ground.

   - Absolutism and a lack of, or weak, political centralization are two different barriers to the spread of industry. But they are also connected; both are kept in place by fear of creative destruction and because the process of political centralization often creates a tendency toward absolutism. Resistance to political centralization is motivated by reasons similar to resistance to inclusive political institutions: fear of losing political power, this time to the newly centralizing state and those who control it. We saw in the previous chapter how the process of political centralization under the Tudor monarchy in England increased demands for voice and representation by different local elites in national political institutions as a way of staving off this loss of political power. A stronger Parliament was created, ultimately enabling the emergence of inclusive political institutions.

   - By the fifteenth century, it represented only eighteen cities, each of whom sent two deputies. In consequence, the Cortes did not represent as broad a set of groups as the English Parliament did, and it never developed as a nexus of diverse interests vying to place constraints on absolutism. It could not legislate, and even the scope of its powers with respect to taxation was limited. This all made it easier for the Spanish monarchy to sideline the Cortes in the process of consolidating its own absolutism. Even with silver coming from the Americas, Charles V and Philip II required ever-increasing tax revenues to finance a series of expensive wars.

   - When the English philanthropist Robert Owen tried to convince the Austrian government to adopt some social reforms in order to ameliorate the conditions of poor people, one of Metternich’s assistants, Friedrich von Gentz, replied,“We do not desire at all that the great masses shall become well off and independent … How could we otherwise rule over them?”

   - The problem in Kongo was that people understood that whatever they produced could be confiscated by an absolutist monarch, and therefore they had no incentive to invest or use better technology. In the Habsburg lands, Francis did not encourage his citizens to adopt better technology; on the contrary, he actually opposed it, and blocked the dissemination of technologies that people would have been otherwise willing to adopt with the existing economic institutions.

   - The radical philosopher Peter Kropotkin, one of the founders of modern anarchism, left a vivid depiction of the way serfdom worked during the reign of Tsar Nicholas I, who ruled Russia from 1825 until 1855. He recalled from his childhood stories of men and women torn from their families and their villages and sold, lost in gambling, or exchanged for a couple of hunting dogs, and transported to some remote part of Russia … of children taken from their parents and sold to cruel or dissolute masters; of flogging“in the stables,” which occurred every day with unheard of cruelty; of a girl who found her only salvation in drowning herself; of an old man who had grown grey-haired in his master’s service and at last hanged himself under his master’s window; and of revolts of serfs, which were suppressed by Nicholas I’s generals by flogging to death each tenth or fifth man taken out of the ranks, and by laying waste the village … As to the poverty which I saw during our journeys in certain villages, especially in those which belonged to the imperial family, no words would be adequate to describe the misery to readers who have not seen it.

   - Just as Kankrin opposed industry, he saw no reason to promote railways, which he argued would bring a socially dangerous mobility, noting that“railways do not always result from natural necessity, but are more an object of artificial need or luxury. They encourage unnecessary travel from place to place, which is entirely typical of our time.”

   - While Britain and most of northwest Europe was crisscrossed with railways in 1870, very few penetrated the vast territory of Russia. The policy against railways was only reversed after Russia’s conclusive defeat by British, French, and Ottoman forces in the Crimean War, 1853–1856, when the backwardness of its transportation network was understood to be a serious liability for Russian security. There was also little railway development in Austria-Hungary outside of Austria and the western parts of the empire, though the 1848 Revolutions had brought change to these territories, particularly the abolition of serfdom.

   - Under the Song dynasty, between 960 and 1279, China led the world in many technological innovations. The Chinese invented clocks, the compass, gunpowder, paper and paper money, porcelain, and blast furnaces to make cast iron before Europe did. They independently developed spinning wheels and waterpower at more or less the same time that these emerged at the other end of Eurasia. In consequence, in 1500 standards of living were probably at least as high in China as they were in Europe. For centuries China also had a centralized state with a meritocratically recruited civil service.

   - The reasoning of the Ming and Qing states for opposing international trade is by now familiar: the fear of creative destruction. The leaders’ primary aim was political stability. International trade was potentially destabilizing as merchants were enriched and emboldened, as they were in England during the era of Atlantic expansion. This was not just what the rulers believed during the Ming and Qing dynasties, but also the attitude of the rulers of the Song dynasty, even if they were willing to sponsor technological innovations and permit greater commercial freedom, provided that this was under their control.

   - The reason Ethiopia is where it is today is that, unlike in England, in Ethiopia absolutism persisted until the recent past. With absolutism came extractive economic institutions and poverty for the mass of Ethiopians, though of course the emperors and nobility benefited hugely. But the most enduring implication of the absolutism was that Ethiopian society failed to take advantage of industrialization opportunities during the nineteenth and early twentieth centuries, underpinning the abject poverty of its citizens today.

   - because they feared that it would be used to control resources, such as valuable land, by allowing the state to claim ownership. They also feared that it would lead to more systematic taxation. The dynasty that Isma’il started did not gel into a powerful state. Even if it had wanted to, the state was not strong enough to impose its will over the objections of the citizens. But there were other, more subtle factors at work. Various elites also opposed political centralization, for example, preferring oral to written interaction with citizens, because this allowed them maximum discretion. Written laws or orders could not be taken back or denied and were harder to change; they set benchmarks that governing elites might want to reverse. So neither the ruled nor the rulers of Taqali saw the introduction of writing to be to their advantage.

   - The ruled feared how the rulers would use it, and the rulers themselves saw the absence of writing as aiding their quite precarious grip on power. It was the politics of Taqali that kept writing from being introduced. Though the Somalis had even less of a well-defined elite compared with the Taqali kingdom, it is quite plausible that the same forces inhibited their use of writing and their adoption of other basic technologies.

   - The Industrial Revolution created a transformative critical juncture for the whole world during the nineteenth century and beyond: those societies that allowed and incentivized their citizens to invest in new technologies could grow rapidly. But many around the world failed to do so—or explicitly chose not to do so. Nations under the grip of extractive political and economic institutions did not generate such incentives.

 - ## 9. Reversing Development

   - The Dutch also took control of the Banda Islands, intending this time to monopolize mace and nutmeg. But the Banda Islands were organized very differently from Ambon. They were made up of many small autonomous city-states, and there was no hierarchical social or political structure. These small states, in reality no more than small towns, were run by village meetings of citizens. There was no central authority whom the Dutch could coerce into signing a monopoly treaty and no system of tribute that they could take over to capture the entire supply of nutmeg and mace. At first this meant that the Dutch had to compete with English, Portuguese, Indian, and Chinese merchants, losing the spices to their competitors when they did not pay high prices. Their initial plans of setting up a monopoly of mace and nutmeg dashed, the Dutch governor of Batavia, Jan Pieterszoon Coen, came up with an alternative plan. Coen founded Batavia, on the island of Java, as the Dutch East India Company’s new capital in 1618. In 1621 he sailed to Banda with a fleet and proceeded to massacre almost the entire population of the islands, probably about fifteen thousand people. All their leaders were executed along with the rest, and only a few were left alive, enough to preserve the know-how necessary for mace and nutmeg production. After this genocide was complete, Coen then proceeded to create the political and economic structure necessary for his plan: a plantation society. The islands were divided into sixty-eight parcels, which were given to sixty-eight Dutchmen, mostly former and current employees of the Dutch East India Company. These new plantation owners were taught how to produce the spices by the few surviving Bandanese and could buy slaves from the East India Company to populate the now-empty islands and to produce spices, which would have to be sold at fixed prices back to the company.

   - WE SAW IN CHAPTER 7 how European expansion into the Atlantic fueled the rise of inclusive institutions in Britain. But as illustrated by the experience of the Moluccas under the Dutch, this expansion sowed the seeds of underdevelopment in many diverse corners of the world by imposing, or further strengthening existing, extractive institutions. These either directly or indirectly destroyed nascent commercial and industrial activity throughout the globe or they perpetuated institutions that stopped industrialization. As a result, as industrialization was spreading in some parts of the world, places that were part of European colonial empires stood no chance of benefiting from these new technologies.

   - Institutions, even religious ones, became perverted by the desire to capture and sell slaves. One example is the famous oracle at Arochukwa, in eastern Nigeria. The oracle was widely believed to speak for a prominent deity in the region respected by the major local ethnic groups, the Ijaw, the Ibibio, and the Igbo. The oracle was approached to settle disputes and adjudicate on disagreements. Plaintiffs who traveled to Arochukwa to face the oracle had to descend from the town into a gorge of the Cross River, where the oracle was housed in a tall cave, the front of which was lined with human skulls. The priests of the oracle, in league with the Aro slavers and merchants, would dispense the decision of the oracle. Often this involved people being“swallowed” by the oracle, which actually meant that once they had passed through the cave, they were led away down the Cross River and to the waiting ships of the Europeans. This process in which all laws and customs were distorted and broken to capture slaves and more slaves had devastating effects on political centralization, though in some places it did lead to the rise of powerful states whose main raison d’être was raiding and slaving.

   - Though the end of the slave trade after 1807 did reduce the external demand for slaves from Africa, this did not mean that slavery’s impact on African societies and institutions would magically melt away. Many African states had become organized around slaving, and the British putting an end to the trade did not change this reality. Moreover, slavery had become much more prevalent within Africa itself. These factors would ultimately shape the path of development in Africa not only before but also after 1807.

   - African societies took aggressive advantage of the economic opportunities presented by the slave trade, they did the same with legitimate commerce. But they did so in a peculiar context, one in which slavery was a way of life but the external demand for slaves had suddenly dried up. What were all these slaves to do now that they could not be sold to Europeans? The answer was simple: they could be profitably put to work, under coercion, in Africa, producing the new items of legitimate commerce.

   - As a result slavery, rather than contracting, appears to have expanded in Africa throughout the nineteenth century. Though accurate figures are hard to come by, a number of existing accounts written by travelers and merchants during this time suggest that in the West African kingdoms of Asante and Dahomey and in the Yoruba city-states well over half of the population were slaves. More accurate data exist from early French colonial records for the western Sudan, a large swath of western Africa, stretching from Senegal, via Mali and Burkina Faso, to Niger and Chad. In this region 30 percent of the population was enslaved in 1900.

   - Though much of European penetration into Africa was justified on the grounds that slavery had to be combated and abolished, the reality was different. In most parts of colonial Africa, slavery continued well into the twentieth century. In Sierra Leone, for example, it was only in 1928 that slavery was finally abolished, even though the capital city of Freetown was originally established in the late eighteenth century as a haven for slaves repatriated from the Americas. It then became an important base for the British antislavery squadron and a new home for freed slaves rescued from slave ships captured by the British navy. Even with this symbolism slavery lingered in Sierra Leone for 130 years. Liberia, just south of Sierra Leone, was likewise founded for freed American slaves in the 1840s. Yet there, too, slavery lingered into the twentieth century; as late as the 1960s, it was estimated that one-quarter of the labor force were coerced, living and working in conditions close to slavery. Given the extractive economic and political institutions based on the slave trade, industrialization did not spread to sub-Saharan Africa, which stagnated or even experienced economic retardation as other parts of the world were transforming their economies.

   - The backwardness of the Transkei is not just a historic remnant of the natural backwardness of Africa. The dual economy between the Transkei and Natal is in fact quite recent, and is anything but natural. It was created by the South African white elites in order to produce a reservoir of cheap labor for their businesses and reduce competition from black Africans. The dual economy is another example of underdevelopment created, not of underdevelopment as it naturally emerged and persisted over centuries.

   - One of the success stories was Stephen Sonjica in the Ciskei, a self-made farmer from a poor background. In an address in 1911, Sonjica noted how when he first expressed to his father his desire to buy land, his father had responded:“Buy land? How can you want to buy land? Don’t you know that all land is God’s, and he gave it to the chiefs only?” Sonjica’s father’s reaction was understandable. But Sonjica was not deterred. He got a job in King William’s Town and noted: I cunningly opened a private bank account into which I diverted a portion of my savings … This went only until I had saved eighty pounds … [I bought] a span of oxen with yokes, gear, plough and the rest of agricultural paraphernalia … I now purchased a small farm … I cannot too strongly recommend [farming] as a profession to my fellow man … They should however adopt modern methods of profit making. An extraordinary piece of evidence supporting the economic dynamism and prosperity of African farmers in this period is revealed in a letter sent in 1869 by a Methodist missionary, W. J. Davis. Writing to England, he recorded with pleasure that he had collected forty-six pounds in cash“for the Lancashire Cotton Relief Fund.” In this period the prosperous African farmers were donating money for relief of the poor English textile workers!

   - This new economic dynamism, not surprisingly, did not please the traditional chiefs, who, in a pattern that is by now familiar to us, saw this as eroding their wealth and power. In 1879 Matthew Blyth, the chief magistrate of the Transkei, observed that there was opposition to surveying the land so that it could be divided into private property. He recorded that“some of the chiefs … objected, but most of the people were pleased … the chiefs see that the granting of individual titles will destroy their influence among the headmen.”

   - Chiefs also resisted improvements made on the lands, such as the digging of irrigation ditches or the building of fences. They recognized that these improvements were just a prelude to individual property rights to the land, the beginning of the end for them. European observers even noted that chiefs and other traditional authorities, such as witch doctors, attempted to prohibit all“European ways,” which included new crops, tools such as plows, and items of trade. But the integration of the Ciskei and the Transkei into the British colonial state weakened the power of the traditional chiefs and authorities, and their resistance would not be enough to stop the new economic dynamism in South Africa. In Fingoland in 1884, a European observer noted that the people had

   - Even a modicum of inclusive institutions and the erosion of the powers of the chiefs and their restrictions were sufficient to start a vigorous African economic boom. Alas, it would be short lived. Between 1890 and 1913 it would come to an abrupt end and go into reverse. During this period two forces worked to destroy the rural prosperity and dynamism that Africans had created in the previous fifty years. The first was antagonism by European farmers who were competing with Africans. Successful African farmers drove down the price of crops that Europeans also produced. The response of Europeans was to drive the Africans out of business. The second force was even more sinister. The Europeans wanted a cheap labor force to employ in the burgeoning mining economy, and they could ensure this cheap supply only by impoverishing the Africans. This they went about methodically over the next several decades.

   - Both of the goals of removing competition with white farmers and developing a large low-wage labor force were simultaneously accomplished by the Natives Land Act of 1913. The act, anticipating Lewis’s notion of dual economy, divided South Africa into two parts, a modern prosperous part and a traditional poor part. Except that the prosperity and poverty were actually being created by the act itself. It stated that 87 percent of the land was to be given to the Europeans, who represented about 20 percent of the population. The remaining 13 percent was to go to the Africans. The Land Act had many predecessors, of course, because gradually Europeans had been confining Africans onto smaller and smaller reserves. But it was the act of 1913 that definitively institutionalized the situation and set the stage for the formation of the South African Apartheid regime, with the white minority having both the political and economic rights and the black majority being excluded from both.

   - To the development economists who visited South Africa in the 1950s and ’60s, when the academic discipline was taking shape and the ideas of Arthur Lewis were spreading, the contrast between these Homelands and the prosperous modern white European economy seemed to be exactly what the dual economy theory was about. The European part of the economy was urban and educated, and used modern technology. The Homelands were poor, rural, and backward; labor there was very unproductive; people, uneducated. It seemed to be the essence of timeless, backward Africa.

   - Yes, the Homelands were poor and technologically backward, and the people were uneducated. But all this was an outcome of government policy, which had forcibly stamped out African economic growth and created the reservoir of cheap, uneducated African labor to be employed in European-controlled mines and lands. After 1913 vast numbers of Africans were evicted from their lands, which were taken over by whites, and crowded into the Homelands, which were too small for them to earn an independent living from. As intended, therefore, they would be forced to look for a living in the white economy, supplying their labor cheaply. As their economic incentives collapsed, the advances that had taken place in the preceding fifty years were all reversed. People gave up their plows and reverted to farming with hoes—that is, if they farmed at all. More often they were just available as cheap labor, which the Homelands had been structured to ensure.

   - Following the Natives Land Act and other legislation, miners’ wages fell by 30 percent between 1911 and 1921. In 1961, despite relatively steady growth in the South African economy, these wages were still 12 percent lower than they had been in 1911. No wonder that over this period South Africa became the most unequal country in the world.

   - But even in these circumstances, couldn’t black Africans have made their way in the European, modern economy, started a business, or have become educated and begun a career? The government made sure these things could not happen. No African was allowed to own property or start a business in the European part of the economy—the 87 percent of the land. The Apartheid regime also realized that educated Africans competed with whites rather than supplying cheap labor to the mines and to white-owned agriculture.

 - ## 10. The Diffusion of Prosperity

 - ## 11. The Virtuous Circle

 - ## 12. The Vicious Circle

 - ## 13. Why Nations Fail Today

 - ## 14. Breaking the Mold

 - ## 15. Understanding Prosperity and Poverty

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