First, if we summarize the core viewpoint of this book in the simplest terms, it revolves around the concepts of inclusive institutions and extractive institutions. The author's argument is that it is precisely the distinction between inclusive and extractive institutions that leads to differences in national development.
Two different government structures determine the varying outcomes of economic development. To clarify the logic behind this, we first need to introduce what inclusive institutions are and what extractive institutions are.
In simple terms, inclusive institutions focus on sharing wealth, while extractive institutions focus on extracting social resources and wealth. This fundamental difference also leads to different social forms. Under inclusive institutions, the goal is to encourage people to participate in economic activities to achieve wealth sharing. To better facilitate this, the focus is on maintaining the normal operation of market economic activities, which includes protecting private property. Additionally, to ensure that wealth can continue to expand and productivity can improve, inclusive institutions must ensure that emerging enterprises can emerge without being suppressed. In contrast, the main responsibility of extractive institutions is different.
Extractive institutions primarily serve a small number of rulers, and their main duty is to extract social wealth for these rulers. Thus, the entire society pays more attention to establishing a complete extraction system to ensure that wealth can be generated. In simple terms, inclusive institutions aim for everyone to prosper together, while extractive institutions have the sole goal of enriching the rulers.
To illustrate what inclusive and extractive institutions are, the author uses South Korea and its northern neighbor as examples. South Korean youth can receive a good education, allowing them to participate in the process of wealth sharing and creation. Additionally, in companies established in South Korea, private wealth is also protected, among other benefits. In this broader context, everyone can actively participate in economic development and share in its results. Conversely, in the northern neighbor, students do not receive a good education and must enlist in the military after graduation. Furthermore, even when they work, the vast majority of the wealth they create is extracted by the dominant 80s family.
Having discussed inclusive and extractive institutions, let's talk about their impact on economic development. First, we need to address why extractive institutions are bound to fail while inclusive institutions are bound to succeed.
Before clarifying this issue, we must mention another concept: creative destruction. We need to understand this concept to grasp the subsequent content. Creative destruction is a theory proposed by Austrian political economist Joseph Schumpeter.
A typical case is the emergence of the iPhone, which revolutionized the mobile phone industry and ushered in the era of smartphones. Most people benefited from the advantages brought by this transition, but traditional phone manufacturers like Nokia and Blackberry suffered greatly. This illustrates the negative effects of technological progress on certain groups. Of course, this is just a simple example; if we broaden the concept of creative destruction, these innovations can even disrupt social classes. For instance, the invention of the steam engine led to the Industrial Revolution, which facilitated the rise of the bourgeoisie, thereby completely overturning the rule of monarchy in Europe. Technological progress not only creates wealth but also reshapes social structures, and the European monarchy would certainly be negatively affected by such technological advancements. In the concept of creative destruction, technological progress is always accompanied by an increase in productivity, and this increase in productivity is also accompanied by changes in social classes. Regardless of the nature of class changes, they will inevitably harm the interests of the current ruling class, which is why they will do everything possible to prevent such innovations. This is Schumpeter's theory of creative destruction.
Schumpeter believed that Western monopolistic capitalists would become stumbling blocks to technological progress, and thus predicted the inevitable demise of capitalism. However, the outcome has clearly not aligned with his expectations.
With the introduction of various antitrust laws in Europe and the United States, America and Europe have experienced continuous cycles of creative destruction. This does not mean that Schumpeter's theory has completely failed. The author of "Why Nations Fail" has patched Schumpeter's theory, refining it. In the new theory, it is not capitalists who hinder creative destruction, but rather an extractive institution. As long as a country has inclusive institutions, it will not obstruct the emergence of creative destruction.
A classic example of this narrative is the Qing Dynasty. The products of the West may have brought technological advancements to the Qing rulers, but these advancements posed a threat to their rule rather than benefits.
Technological innovation can lead to the growth of the bourgeoisie, changes in people's thoughts, and uncertainties regarding their rule. This is the fundamental reason why the Qing Dynasty rejected the entry of such technologies into China.
Rulers always create an economic system that benefits themselves. If the rulers are just a small group, they lack the motivation to embrace technological innovation. This is because new technological innovations are often not created by the ruling class; just as the steam engine could not have been invented by Kangxi, those who create and utilize technological innovations will inevitably experience a rise in social class, which serves as their motivation for innovation. However, this rise in class will certainly be resisted by the current rulers.
Extractive institutions inherently reject technological innovation. However, if the rulers are the majority, the situation changes. Although the inventors of technological innovations may benefit the most, the majority can still gain advantages from these innovations. At this point, the entire society will have the motivation to promote innovation. Only when the beneficiaries of technological innovation, that is, the majority, become the rulers of society will technological innovation be accepted. Therefore, inclusive institutions align with technological innovation.
Thus, regarding why the Industrial Revolution occurred in the West, the author provides a different narrative. He believes that it was precisely because the Glorious Revolution transformed England from an extractive institution to an inclusive institution that the Industrial Revolution took place in England. Only under inclusive institutions can the emergence of creative destruction be guaranteed; this is a fundamental logic of the author.
Some may ask, why do some countries with extractive institutions still manage to develop? The author also provides an explanation here. He argues that while extractive institutions have no future, countries under extractive institutions can develop to a certain extent. He categorizes extractive institutions into three types.
The first type is one where centralized extractive institutions cannot be established at all, a typical example being Somalia. Such a system will never develop, and not only does civil development suffer, but the wealth extracted by the rulers is also limited.
The second type includes the northern neighbor of Korea and the Congo during Mobutu's rule. This type of extractive institution has achieved centralization, but the rulers focus all their energy on extracting from the people. In this case, the top tier of the state is generally wealthy, but due to high levels of extraction, the people remain impoverished.
The third type resembles the state of South Korea during Park Chung-hee's era and the former Soviet Union. These governments have achieved centralization and the rulers understand how to benefit from economic development, realizing that only by expanding the economic pie can they extract more. In this scenario, society can develop, but this development has a limit: when development requires innovation, it will cease. This is because their development belongs to the industrialization period, where progress relies not on technological innovation but on technological learning, capital accumulation, and advancements in production machinery. This type of development is entirely controllable for the rulers, as they know what can be developed and which industries can grow. Therefore, they can strategically position themselves in advance to capture most of the benefits of societal development.
Moreover, due to this advance positioning, even if development occurs, their ruling status will not be shaken. However, when true technological innovation is required, this development will abruptly stop. This is because genuine technological innovation is inherently unpredictable. For example, the emergence of AI was completely unforeseen, and such innovations instill fear and instinctive resistance in rulers. The result of this resistance is the suppression of innovation, and once innovation is suppressed, economic development will inevitably stagnate.