"I'm in the process of reading the book _Why Nation Fails_. The central thesis is that rich and poor countries are separated by inclusive vs extractive institutions.

It seems to resonate a bit here, when Marc speaks of things like regulatory capture."

However if we actually look at the pages of that book from 2012, the authors never use the US, or any present day "Western" country, as an example of one that had or has extractive instutitions. Instead they cite examples such as Mexico, Colombia, Argentina, Venezuela, Uzbekistan, Zimbabwe, Sierra Leone, Angola, Sudan, Chad, Cameroon, Liberia, Egypt, North Korea, Nepal, or Haiti.

According to the authors, the US currently has inclusive institutions and uses the example of the software industry as a success story to support this argument. This industry is in fact the blog post author's area of focus as a former programmer turned venture capitalist.

To quote from the book:

(Note the bit about fraud. The US had serious problems with fraud 100 years ago, and still does. Consider that is why the SEC exists. Many would argue it has very limited powers of enforcement to deal with modern-day fraud.)

"Bill Gates, like other legendary figures in the information technology industry (such as Paul Allen, Steve Ballmer, Steve Jobs, Larry Page, Sergey Brin, and Jeff Bezos), had immense talent and ambition. But he ultimately responded to incentives. The schooling system in the United States enabled Gates and others like him to acquire a unique set of skills to complement their talents. The economic institutions in the United States enabled these men to start companies with ease, without facing insurmountable barriers. Those institutions also made the financing of their projects feasible. The U.S. labor markets enabled them to hire qualified personnel, and the relatively competitive market environment enabled them to expand their companies and market their products. These entrepreneurs were confident from the beginning that their dream projects could be implemented: they trusted the institutions and the rule of law that these generated and they did not worry about the security of their property rights. Finally, the political institutions ensured stability and continuity. For one thing, they made sure that there was no risk of a dictator taking power and changing the rules of the game, expropriating their wealth, imprisoning them, or threatening their lives and livelihoods. They also made sure that no particular interest in society could warp the government in an economically disastrous direction, because political power was both limited and distributed sufficiently broadly that a set of economic institutions that created the incentives for prosperity could emerge. Secure property rights, the law, public services, and the freedom to contract and exchange all rely on the state, the institution with the coercive capacity to impose order, prevent theft and fraud, and enforce contracts between private parties. To function well, society also needs other public services: roads and a transport network so that goods can be transported; a public infrastructure so that economic activity can flourish; and some type of basic regulation to prevent fraud and malfeasance.

Though many of these public services can be provided by markets and private citizens, the degree of coordination necessary to do so on a large scale often eludes all but a central authority. The state is thus inexorably intertwined with economic institutions, as the enforcer of law and order, private property, and contracts, and often as a key provider of public services. Inclusive economic institutions need and use the state."

The US approach to business does have its flaws. However the book "Why Nations Fail" does not address them. To the authors, the US is a nation that "succeeded", and continues to succeed, by having inclusive institutions, not one that "failed" or is failing today.

A book like "Why Nations Fail", and there are many others like it, arguably encourages readers to view the US, irrespective of its flaws, as the shining example of what a country could/should aspire to become. There are no present-day comparisons of the US with Western Europe in books of this type. Such books are arguably part of the reason for certain institutional problems that will forever remain unfixed in the US, e.g. regulatory capture and complexity, because books like these have themes that support the idea that America's "solutions" are not just different but better than all the others.

This book really has no relation to any criticism of US institutions. If anything, it supports the idea that the US has the best formula for creating a rich country, i.e., a country where "anyone can be rich". They compare how Bill Gates became wealthy versus how Carlos Slim became wealthy.

From a presentatation given by the authors:

Acemoglu Robinson (Harvard) Why Nations Fail June 6, 2011 8 / 36

Main Concepts Inclusive and Extractive Institutions

Towards a Theory of Institutions

Extractive economic institutions: Lack of law and order. Insecure property rights; entry barriers and regulations preventing functioning of markets and creating a nonlevel playing field.

Extractive political institutions -- in the limit of absolutism: Political institutions concentrating power in the hands of a few, without constraints, checks and balances or rule of law.

Inclusive economic institutions: Secure property rights, law and order, markets and state support (public services and regulation) for markets; open to relatively free entry of new businesses; uphold contracts; access to education and opportunity for the great majority of citizens.

Inclusive political institutions: Political institutions allowing broad participation pluralism and placing constraints and checks on politicians; rule of law (closely related to pluralism).

But also some degree of political centralization for the states to be able to selectively enforce law and order.

Acemoglu Robinson (Harvard) Why Nations Fail June 6, 2011 36 / 36

Why Nations have and Do Fail

Because they have extractive political and economic institutions.

These are difficult to change though they can be successfully challenged and altered during critical junctures.

The roots of modern world inequality lie in the emergence of inclusive institutions in Britain and the fruits of this - the industrial revolution - spread to those parts of the world that had similar institutions (settler colonies) or quickly developed them (Western Europe).

Other parts of the world languished with extractive institutions which have persisted over time and thus remain poor today.