Friday, September 2, 2016

A small elite extorts the most it can from a society's productive resources and keeps almost everything for itself

From A Troublesome Inheritance by Nicholas Wade. Page 192.
Surely economists, historians,or other social scientists must have devised some convincing explanation for this substantial and enduring inequality? "Not so," say Acemoglu and Robinson: "Most hypotheses that social scientists have proposed for the origins of poverty and prosperity just don't work and fail to convincingly explain the lay of the land."

Their thesis is that there are bad and good institutions or, as they term them, extractive and inclusive institutions. The bad, extractive institutions are those in which a small elite extorts the most it can from a society's productive resources and keeps almost everything for itself. The elite opposes technological change because it is disruptive of the political and economic order required to maintain their position. Through its own greed, the elite impoverishes everyone else and prevents progress. A permanent vicious circle between the society's extractive political and economic institutions maintains continual stagnation.

Good, inclusive institutions, by contrast, are those in which political and economic power is widely shared. The rule of law and property rights reward endeavor. No sector of society is powerful enough to block economic change. A virtuous circle between politics and economics maintains increasing prosperity.

The archetype of inclusive institutions, in Acemoglu and Robinson's view, was the Glorious Revolution of 1688, in which England replaced its French-Leaning king, James II, with his son-in-law William of Orange, a switch that consolidated Parliaments control over the king. Both political and economic institutions became more inclusive, creating incentives for entrepreneurs and laying the basis for the Industrial Revolution.
Independent of Acemoglu and Robinson's argument, doesn't that summary sound eerily contemporary, not only in the US but in Europe, China, India:
The bad, extractive institutions are those in which a small elite extorts the most it can from a society's productive resources and keeps almost everything for itself.
The difference is the elite don't oppose technological change. Why? Perhaps because the elite now drive technological change because it doesn't threaten position but reinforces it. Who are the biggest defenders of the crony capitalist status quo? Wall Street, Media, the Academy, and Tech. All highly regulated and highly dependent on a raft of dizzying collusions with the centers of power. They use the power of the state to ensure that they are indeed beneficiaries. Hence the revolt of the hoi polloi across the US and Europe.

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