This book is an excellent example of studies in social economics. It is available in the bookshops at the world airports, securing an economic success for its authors. The ambition to reach the public at large dominates the framing of the books, focusing on telling stories drawn from the entire known history of mankind, or narratives as evidence, bypassing quantitative information or statistical evidence almost entirely. What results is easy reading and an also fascinating enquiry into the sources of wealth and poverty, employing the neo-institutionalist framework, i.e. emphasizing the impact of rules and their institutionalization.
Affluence of a country is a function of economic output, or the GDP. As the textbook teaches us, economic growth is related to: labour, capital and technology, under the law of diminishing returns. Thus, there must be balanced growth in all three components of economic growth:
(1) education, training and additional labour input;
(2) investments, new factories, additional infrastructure; and
(3) innovations, patents and the process of “creative destruction”.
What Acemoglu and Robinson achieve is to show that the key rules in the society – its institutions – have a large impact upon these three factors (1)-(3). To vindicate their theory that the central norms in society explain how the key elements in the neo-classical growth model above develop over time, they construct two ideal-type models of institutions in a country: extractive rules and inclusive norms. The former set of institutions destroys economic growth whereas the latter set of rules promotes it, when properly enforced.
Evidence? “Extraction” covers all kinds of phenomena where whatever affluence exists is captured and dissipated: wars, looting, exploitation, monopoly and oligopoly, corruption, embezzlement, patronage, etc. Inclusive norms institutionalize the opposite phenomena: surplus sharing, competition, innovation – an open society with peace and a flourishing market economy. Now, this has been said before for institutional economists and public choice scholars. What is new with this challenging volume is that idea that economic and political institutions go together, meaning that a country will only have inclusive economic institutions when it has established political institutions that are inclusive, meaning comprehensive political representation and the rule of law, typical of what Marxists call “capitalist democracies”.
The narratives do substantiate this theory, as they are both telling and often witty. But it is not difficult to raise objections to this theory:
(1) China, the Gulf monarchies and Singapore hardly confirms the theory; Chinese economical miracle will run into difficulties soon, we are told;
(2) the western capitalist democracies are plagued by economic decline, rising inequalities and the politics of austerity, reducing economic growth to zero; and
(3) affluence seems to become more and more concentrated with the superrich, enjoying the conspicuous consumption of Thorstein Veblen, while poverty and social exclusion is on the rise in capitalist democracies.
