Quotes from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“As we will show, poor countries are poor because those who have power make choices that create poverty.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Inclusive economic and political institutions do not emerge by themselves. They are often the outcome of significant conflict between elites resisting economic growth and political change and those wishing to limit the economic and political power of existing elites.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“NATIONS FAIL TODAY because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Politics is the process by which a society chooses the rules that will govern it.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“THERE ARE HUGE DIFFERENCES in living standards around the world. Even the poorest citizens of the United States have incomes and access to health care, education, public services, and economic and social opportunities that are far superior to those available to the vast mass of people living in sub-Saharan Africa, South Asia, and Central America. The contrast of South and North Korea, the two Nogaleses, and the United States and Mexico reminds us that these are relatively recent phenomena. Five hundred years ago, Mexico, home to the Aztec state, was certainly richer than the polities to the north, and the United States did not pull ahead of Mexico until the nineteenth century. The gap between the two Nogaleses is even more recent. South and North Korea were economically, as well as socially and culturally, indistinguishable before the country was divided at the 38th parallel after the Second World War. Similarly, most of the huge economic differences we observe around us today emerged over the last two hundred years. Did”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“This book will show that while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“The most common reason why nations fail today is because they have extractive institutions.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“The political institutions of a society are a key determinant of the outcome of this game. They are the rules that govern incentives in politics. They determine how the government is chosen and which part of the government has the right to do what. Political institutions determine who has power in society and to what ends that power can be used. If the distribution of power is narrow and unconstrained, then the political institutions are absolutist, as exemplified by the absolutist monarchies reigning throughout the world during much of history.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“After an initial phase of looting, and gold and silver lust, the Spanish created a web of institutions designed to exploit the indigenous peoples. The full gamut of encomienda, mita, repartimiento, and trajin was designed to force indigenous people’s living standards down to a subsistence level and thus extract all income in excess of this for Spaniards. This was achieved by expropriating their land, forcing them to work, offering low wages for labor services, imposing high taxes, and charging high prices for goods that were not even voluntarily bought.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“For economists, Argentina is a perplexing country. To illustrate how difficult it was to understand Argentina, the Nobel Prize–winning economist Simon Kuznets once famously remarked that there were four sorts of countries: developed, underdeveloped, Japan, and Argentina.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Westerners, not just Lincoln Steffens. It took in the Central Intelligence Agency of the United States. It even took in the Soviet Union’s own leaders, such as Nikita Khrushchev, who famously boasted in a speech to Western diplomats in 1956 that “we will bury you [the West].” 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. Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way. 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. Gosplan was the supposedly all-powerful planning agency in charge of the central planning of the Soviet economy. One of the benefits of the sequence of five-year plans written and administered by Gosplan was supposed to have been the long time horizon necessary for rational investment and innovation. In reality, what got implemented in Soviet industry had little to do with the five-year plans, which were frequently revised and rewritten or simply ignored. The development of industry took place on the basis of commands by Stalin and the Politburo, who changed their minds frequently and often completely revised their previous decisions. All plans were labeled “draft” or “preliminary.” Only one copy of a plan labeled “final”—that for light industry in 1939—has ever come to light. 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”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“The Industrial Revolution started and made its biggest strides in England because of her uniquely inclusive economic institutions. These in turn were built on foundations laid by the inclusive political institutions brought about by the Glorious Revolution. 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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Argentina was also one of the richest countries in the world in the nineteenth century, as rich as or even richer than Britain, because it was the beneficiary of the worldwide resource boom; it also had the most educated population in Latin America. But democracy and pluralism were no more successful, and were arguably less successful, in Argentina than in much of the rest of Latin America. One coup followed another, and as we saw in chapter 11, even democratically elected leaders acted as rapacious dictators. Even more recently there has been little progress toward inclusive economic institutions, and as we saw in chapter 13, twenty-first-century Argentinian governments can still expropriate their citizens’ wealth with impunity. All”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Our theory has attempted to achieve this by operating on two levels. The first is the distinction between extractive and inclusive economic and political institutions. The second is our explanation for why inclusive institutions emerged in some parts of the world and not in others. While the first level of our theory is about an institutional interpretation of history, the second level is about how history has shaped institutional trajectories of nations. Central”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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. N”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Rich nations are rich largely because they managed to develop inclusive institutions at some point during the past three hundred years. These institutions have persisted through a process of virtuous circles. Even if inclusive only in a limited sense to begin with, and sometimes fragile, they generated dynamics that would create a process of positive feedback, gradually increasing their inclusiveness.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Economic institutions that create incentives for economic progress may simultaneously redistribute income and power in such a way that a predatory dictator and others with political power may become worse off.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“gave up on the idea of creating “socialist men and women” who would work without monetary incentives. In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. It is instructive to understand how this worked. 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. Even when bonuses and incentives were effective in changing behavior, they often created other problems. 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. By the 1940s, the leaders of the Soviet Union, even if not their admirers in the West, were well aware of these perverse incentives. The Soviet leaders acted as if they were due to technical problems, which could be fixed. For example, they moved away from paying bonuses based on output targets to allowing firms to set aside portions of profits to pay bonuses. But a “profit motive” was no more encouraging to innovation than one based on output targets. The system of prices used to calculate profits was almost completely unconnected to the value of new innovations or technology. 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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development—and all-too-common occurrence due to the fear of creative destruction.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“One of the most notorious of these was Cornelius Vanderbilt, who famously remarked, “What do I care about the Law? Hain’t I got the power?”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“آنچه واقعا نیاز داریم بدانیم این است که چرا کشورهای فقیر راه «نادرست» را انتخاب می‌کنند. انتخاب نادرست عمدتا ناشی از غفلت یا فرهنگ نیست. کشورهای تهیدست فقیرند، زیرا حاکمان این کشورها تصمیماتی می‌گیرند که ایجاد فقر می‌کند. آنها اشتباها یا از روی جهل، راه نادرست را در پیش نگرفته‌اند، بلکه عامدانه به این راه می‌روند.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“Indeed, even though Santa Ana was president in Mexico, large parts of the country were not under his control, which enabled the annexation of Texas by the United States.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

“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.”
― Daron Acemoğlu, quote from Why Nations Fail: The Origins of Power, Prosperity, and Poverty

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