Why Nations Fail: The Virtuous Circle vs. The Vicious Circle

Why Nations Fail: The origins of power, prosperity, and poverty

By Daron Acemoglu & James A. Robinson

The Virtuous Circle: British example

How institutions that encourage prosperity create positive feedback loops that prevent the efforts by elites to undermine them.

In May 1723, Parliament passed the Black Act, which created an extraordinary fifty new offenses that were punishable by hanging. The Black Act made it a crime not only to carry weapons but to have a blackened face. The law in fact was soon amended to make blacking punishable by hanging. The Blacks were groups of local men who had their faces "blacked" to conceal their appearance at night. They appeared widely across southern England, killing and maiming deed and other animals, burning down haystacks and barns, destroying fences and fish ponds. On the surface it was sheer lawlesness, but it wasn't. Illegal hunting deed in lands owned by the king or other members of the aristocracy had been going on for a long time. In 1640s during Civil War, the entire population of deer at Windsor Castle was killed. But the Blacks were not just poaching deer to eat, they also engaged in wanton destruction. 

The Whig political party was founded in 1670s to represent the new mercantile and economic interests, was the main organization behind the Glorious Revolution. dominated parliament from 1714 to 1760. Once in power, they were tempted to use their position to prey on the rights of others. They were no different from the Stuart kings, but their power was far from absolute because it was constrained by Tory Party, which had formed to oppose the Whig. The pluralistic nature of society that emerged from the Glorious Revolution meant that the population at large had been empowered, and "blacking" was precisely a response by the common people to perceptions that the Whigs were exploiting their position. The estates of many notable landowners and politicians were also raided by the Blacks.

The events surrounding the Black Act would show that the Glorious Revolution had created the rule of law, and that this notion was stronger in England and Britain, and the elites were far more constrained by it than they themselves imagined.

Notably, the rule of law is not the same as rule by law. The rule of law is a very strange concept when you think about it in historical perspective. Why should laws be applied equally to all? If the king and aristocracy have political power and the rest don't, it's only natural that whatever is fair game for the king and the aristocracy should be banned and punishable for the rest. Indeed, the rule of law is not imaginable under absolutist political institutions. It is a creation of pluralist political institutions and of the broad coalitions that support such pluralism. It's only when many individuals and groups have a say in decisions, and the political power to have a seat at the table, that the idea that they should all be treated fairly starts making sense. 

By the early 18th century, Britain was becoming sufficiently pluralistic and the Whig elites would discover that laws and institutions would constrain them, too. But why did the Whigs didn't use their control over Parliament and the state to force the implementation of the Black Act?  The answer reveals much about the nature of the Glorious Revolution -- why it didn't just replace an old absolutism with a new version: the link between pluralism and the rule of law, and the dynamics of virtuous circles.  The Glorious Revolution was not the overthrow of one elite by another, but a revolution against absolutism by a broad coalition made up of the gentry, merchants, and manufacturers as well as groupings of Whigs and Tories. The emergence of pluralist political institutions was a consequence of this revolution.  The rule of law also emerged as a by-product of this process. Once in place, the notion of the rule of law not only kept absolutism at bay but also created a type of virtuous circle: if the laws applied equally to everybody, then no individual or group could rise above the law, and common people accused of encroaching on private property still hand the right to a fair trial. 

The history of the Black Act and the limits to its implementation illustrate the virtuous circle, a powerful process of positive feedback that preserves these institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circle stems partly fro the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrined in the rule of law. The ability of a subset to impose its will on others without any constraints, even if those others are ordinary citizens, threatens this very balance. If it were temporarily suspended in the case of the peasants protesting against elites encroaching on their communal lands, what was there to guarantee that it would not be suspended again? What would prevent the crown and aristocracy from taking back what the merchants, businessmen, and the gentry had gained? In fact, the next time it was suspended, perhaps the entire project of pluralism would come crumbling down, because a narrow set of interests would take control at the expense of the broad coalition. The political system would not risk this. But this made pluralism, and the rule of law that it implied, persistent features of British political institutions. And we will see that once pluralism and the rule of law were established, there would be demand for even greater pluralism and greater participation in the political process. 

The virtuous circle arises not only from the inherent logic of pluralism and the rule of law, but also because inclusive political institutions tend to support inclusive economic institutions. This then leads to a more equal distribution of income, empowering a broad segment of society and making the political playing field even more level. This limits what one can achieve by usurping political power and reduces the incentives to re-create extractive political institutions. These factors were important in the emergence of truly democratic political institutions in Britain. 

Pluralism also crates a more open system and allows independent media to flourish, making it easier for groups that have an interest in the continuation of inclusive institutions to become aware and organize against threats to these institutions. It is highly significant that the English state stopped censoring the media after 1688. The media played a similarly important role in empowering the population at large and in the continuation of the virtuous circle of institutional development in U.S. 

The response to the Black Act showed ordinary British people that they had more rights than they previously realized. They could defend their traditional rights and economic interests in the courts and in parliament through the use of petitions and lobbying. But this pluralism had not yet delivered effective democracy. Most adult men could not vote, neither could women. All this was to change.The virtuous circle of inclusive institutions not only preserves what has already been achieved but also opens the door to greater inclusiveness. It was only a matter of time until more and more of the population demanded the right to participate in the political process. And in the years leading up to 1831, they did. The 1831 election was mostly about a single issue: political reform. Reforms were granted because the elite thought that reform was the only way to secure the continuation of their rule. The Whigs won the election, and their leader, Earl Grey, became the prime minister. His famous speech to parliament in favor of political reform, said this: 

"There is no-one more decided against annual parliaments, universal suffrage and the ballot, than I am. My object is not to favour, but to put an end to such hopes and projects ... The principle of my reform is, to prevent the necessity of revolution.. reforming to preserve and not to overthrow. "

Why did Earl Grey feel that partiap reform was the only way to preserve the system? Why did they have to put up with the lesser of the two evils, reform or revolution, rather than maintaining their power without any reform? The economic and political changes that had already taken place in Britain made using force to repress these demands both unattractive for the elite and increasingly infeasible. There was also dynamic positive feedback between inclusive economic and political institutions making such a course of action attractive. Inclusive economic institutions led to the development of inclusive markets, inducing a more efficient allocation of resources, greater encouragement to acquire education and skills, and further innovations in technology. All of there forces were in play in Britain by 1831. Clamping down on popular demands would destroy these gains and the elites opposing greater democratization and greater inclusiveness might find themselves among those losing their fortunes from this destruction. 

Another aspect of this positive feedback is that under inclusive economic and political institutions,  controlling power became less central. In Austria-Hungary and in Russia, the monarchs and the aristocracy had much to lose from industrialization and reform. In contrast, in Britain at the beginning of the 19th century, thanks to the development of inclusive economic institutions, there was much less at stake: there were no serfs, relatively little coercion in the labor market, and few monopolies protected by entry barriers. Clinging to power was thus much less valuable for the British elite. 

The British inclusive institutions had also already unleashed the Industrial Revolution, and Britain was highly urbanized. Using repression against an urban, concentrated, and partially organized and empowered group of people would have been much harder than repressing a peasantry or dependent serfs. 

Parallel with the gradual development of more inclusive political institutions was a movement toward even more inclusive economic institutions. One major consequence of the First Reform Act was the repeal of the Corn laws in 1846. The Corn laws banned the import of grains and cereals, keeping their prices high and ensuring lucrative profits for large landowners. The new parliamentarians from Manchester and Birmingham wanted cheap corn and low wages. They won, and the landed interests suffered a major defeat. 

In 1871, the Liberal prime minister Gladstone opened up the civil service to public examination. Liberal and Tory governments during this period introduced a considerable amount of labor market legislation. The masters and Servants Acts, which allowed employers to use the law to reduce the mobility of their workers, was repealed, changing the nature of labor relations in favor of workers. During 1906-1914 under Liberal party leadership, the state provided far more public services including health and unemployment insurance, government-financed pensions, minimum wages, and a commitment to redistributive taxation. The tax system also became more progressive, so the wealthier bore a heavier burden. 

Meanwhile the education system, which was previously either primarily for the elite, run by religious denominations, or required poor people to pay the fees, was made more accessible to the masses. The Education Act of 1870 committed the government to the systematic provision of universal education. Education became free of charge in 1891, the school-leaving age was set at eleven in 1893, in 1899 it was increased to twelve, and special provisions for the children of needy families were introduced. 

In British example, an illustration of the virtuous circle of inclusive institutions, provides an example of a gradual virtuous circle. Gradual change prevented ventures into uncharted territories. A violent overthrow of the system means that something entirely new has to be built in place of what has been removed. This was the case with the French Revolution, when the first experiment with the democracy led to the Terror and then back to a monarchy twice before finally leading to the French Third Republic in 1870. It was the case in the Russian revolution, where the desires of many for a more equal system than that of the Russian Empire led to a one-party dictatorship that was much more violent, bloody, and vicious than what it had replaced. Gradual reform was difficult in these societies precisely because they lacked pluralism and were highly extractive. It was the pluralism emerging from the Glorious Revolution and the rule of law that it introduced that made gradual change feasible and desirable in Britain. 

The Vicious Circle: 
How institutions that create poverty generate negative feedback loops and endure.
During the colonial period, the British used a system of indirect rule to govern Sierra Leone, as they did with most of their African colonies. At the base of this system were the paramount chiefs, who collected taxes, distributed justice, and kept order. The British dealt with the cocoa and coffee farmers not by isolating them, but by forcing them to sell all their produce to a marketing board developed by the colonial office purportedly to help the farmers. Prices for agricultural commodities fluctuated wildly over time. The incomes of farmers fluctuated in tandem. The justification for marketing boards was that they would absorb the price fluctuations. It seemed a good idea in principle, but the reality was very different. The Sierra Leone Produce Marketing Board was set up in 1949. The Board needed a source of revenues to function, to attain these was by paying farmers just a little less than they should have received either in good or bad years. These funds then used for overhead expenditures and administration. The colonial state was using the marketing board as a way of heavily taxing farmers. The British had also stipulated that the office of the paramount chief would be held for life. To be eligible to be a chief, on had to be a member of a recognized "ruling house". The identity of the ruling houses in a chieftaincy developed over time, but it was essentially based on the lineage of the kings in a particular area and of the elites who signed treaties with the British. Chiefs were elected, but not democratically. A body called the Tribal Authority, decided who would become paramount chief.
Many expected the worst practices of colonial rule in sub-Saharan Africa to stop after independence, and the use of marketing boards to excessively tax farmers to come to an end. But neither happened, In fact, the extraction of farmers using marketing boards got much worse.
The behaviour of the marketing boards and the traditional systems of land ownership go a long way to explain why agricultural productivity is so low in much of Sub-Saharan Africa. It was simply because the pricing policies of the marketing boards removed any incentives for the farmers to invest, use fertilizers, or preserve the soil. The contrast between the extractive institutions developed by the British in Sierra Leone and the inclusive institutions that developed in other colonies, such as Australia, is illustrated by the way mineral resources were managed. In 19th century, gold was discoverd in New South Wales. James Macarthur proposed fences be placed around the mining areas and the monopoly rights auctioned off. Yet many in Australia wanted free acess to the gold mining areas. The inclusive model won, and instead of setting up a monopoly, Australian authorities allowed anyone who paid an annual mining license fee to search and dig for gold. Soon the diggers, as these adventurers came to be known, were a powerful force in Australian politics, particularly in Victoria. They played an important role in pushing forward the agenda of universal suffrage and the secret ballot.
We saw two pernicious effects of European expansion and colonial rule in Africa: the introduction of the transatlantic slave trade, which encouraged the development of African political and economic institutions in an extractive direction, and the use of colonial legislation and institutions to eliminate the development of African commercial agriculture that might have competed with Europeans.
Extractive political institutions lead to extractive economic institutions, which enrich a few at the expense of many. Those who benefit from extractive institutions thus have the resources to build their private armies and mercenaries, to buy their judges, and to rig their elections in order to remain in power. They also have every interest in defending the system. Therefore, extractive economic institutions create the platform for extractive political institutions to persist. Power is valuable in regimes with extractive political institutions, because power is unchecked and brings economic riches. Extractive political institutions also provide no checks against abuses of power.
Yet another mechanism for the vicious circle is that extractive institutions, by creating unconstrained power and great income inequality, increase the potential stakes of the political game.

Why nations fail today?
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. Extractive economic and political institutions, though their details vary under different circumstances, are always at the root of this failure.