This book review was written by Eugene Kernes
Genre = Economics, History
Political and economic institutions shape incentives for everyone in the society. Political and economic rules are created and enforced by citizens and state. While the economic system shapes how people earn an income, trade, and innovate, it is the political process that determines under what economic system people live under. Inclusive economic institution encourage participation of everyone in economic activity by unbiased laws, property rights, public services, level playing field for exchange and contract, entry of new business, and individual’s ability to choose their careers. Extractive economic institutions have the inverse properties of inclusive economic institutions, and extract wealth from society to the benefit of a few. Societies choose their economic system through the political process in which they decide what rules to enforce. There is synergy between inclusive political and economic institutions, as there is synergy between extractive political and economic institutions, because those in power will try to retain their status.
Inclusive economic institutions facilitate a willingness of individuals to partake in economic activity knowing that their output will not be arbitrarily taken. As individuals will get rewarded for their output, they are more willing to invest and increase productivity. Inclusive economic institutions create inclusive markets that provide individuals with the same opportunities to utilize their talents. Facilitate obtaining skills and work suited for the individual. Inclusive political institutions have power broadly distributed, and constrain arbitrary power. They have elected representatives which are replaced when they misbehave.
Extractive political institutions do not have many constraints on exercise of power. Leading to extractive economic institutions which are structured to extract resources from the rest of society. To extract wealth, extractive institutions do need some way to stimulate economic activity. Limited prosperity directed to benefit the few. They exclude their citizens from participating in political decisions.
Creative destruction can create different losers and winners. Those who might lose from creative destruction fear inclusive economic and political institutions. Those controlling political power can limit competition to prevent degradation of their privileges.
Critical junctures are events which can disrupt societies political mix. They can break the vicious cycle of extractive institutions, or can endanger inclusive institutions. Inclusive economic and political institutions tend to emerge after a conflict, as there are powers wanting to maintain the status quo. In many cases, conquerors could not coerce labor. The tools they used were instead to incentive labor. To get people to want to work.
Many public services can be provided by the market, but the state has a unique ability to coordinate on a large scale. Markets are not free from becoming extractive when few firms control most of the market. Needing a kind of political centralization to provide law and order. To enable coordination without obtaining monopoly powers that lead to extractive institutions.
This book provides an easy read and a very good understanding of how political and economic institutions shape inequality. Using historical analysis to bring about that understanding. The problem is that there are many issues and inconsistencies in the book.
The focus of the book is only on political and economic institutions, while eager to dismiss the alterative views of geography, culture, and knowledge as factors in inequality. Those factors might not explain everything, but they have shaped what the political and economic institutions people live under. Therein also lies an inconsistency, as during certain parts of the book, the authors used geography, culture, and knowledge as reasons for obtaining certain types of political and economic institutions.
The historical examples quality is mixed. Sometimes there is an in-depth background into the problems of a nation. Other times, incidents are given and described in terms of only inclusive or extractive economic and political institutions, but there were a lot more to the events which can provide a different understanding. There is a lot of history in this book, mainly with the start of the Industrial Revolution, but even during the low historical quality events, it enables the reader to search for more information on the nations.
There is an inconsistency in which inclusive and extractive institutions are described. It appears that inclusive political institutions only produce inclusive economic systems, while extractive political systems only produce extractive economic systems. As in, there appears to be a separation between inclusive and extractive institution. The problem is that economies have a mixture of both inclusive and extractive institutions. In the histories presented, there were turns to and from inclusive or extractive institutions. Which means, and the author do make the claim, that there was conflict between those within the nations on the opposing sides. Not realistic for a society to be completely inclusive, while it may appear that complete extraction is possible.
The issue of the mixture of inclusive and extractive institutions brings up an associated idea of dependency on the past. It appears that there is no way to change the inclusive or extractive institutions without critical junctures. Critical junctures appear random, but this might be because their outcomes during their time were uncertain. The problem is that the conflicts and events of the critical junctures, had social backing and their own precedence. Not very predictable ones, but did require some impetus before the critical juncture.
Questions to Consider while Reading the Book