Why Nations Fail, Chapters 11 and 12

Meeting Name: Jagongbi (Let’s Study Liberalism and Soar)

Book Title: Why Nations Fail

Date and Time: December 3, 2024 (Tue), 8:30 PM

Location: Online Whale ON

Participants: mori, J, Born to Run

Written by: mori

Chapter 11. The Virtuous Circle

The Black Act

- The Whig Party, founded in the 1670s to represent the emerging merchant class and its economic interests, became the focal force of the Glorious Revolution.

- From 1714 to 1760, Parliament was also dominated by the Whigs.

- Afterward, the Whigs infringed on the rights of commoners, leading to the Black Act.

- May 1723: the Black Act was passed.

The Repeal of the Black Act and the Birth of the Rule of Law

November 10, 1724: victory in the trial of Huntridge for violating the Black Act (a jury made up of powerful landowners and the gentry ruled in favor of Huntridge, a commoner)

1824: repeal of the Black Act

- The Glorious Revolution gave birth to the rule of law.

- Even though the Whigs were able to pass harsh and oppressive laws to remove obstacles arising from commoners, they still had to contend with greater constraints because of that very rule of law.

The rule of law is the product of pluralistic political institutions and a broad coalition supporting such pluralism. Only when many individuals and groups possess enough political power to voice their opinions and participate in decision-making does the idea that all of them should be treated fairly begin to make sense.

There was a clear link between pluralism and the rule of law, and the virtuous circle repeated itself.

Pluralistic political institutions emerged as the result of a revolution led by a broad coalition that rose up against absolutism. The rule of law also appeared as a byproduct of this process. When power is shared among many, it is only natural that both law and checks should apply to everyone.

- Once it took root, the concept of the rule of law not only restrained absolutism but also created a kind of virtuous circle: no one could stand above the law, and it applied equally to commoners as well.

Once pluralism and the rule of law are established, demands naturally grow to expand pluralism further and increase opportunities to participate in the political process.

- The reason a virtuous-circle structure emerges is not only because of the underlying logic of pluralism and the rule of law. It is also because inclusive political institutions tend to support inclusive economic institutions: inclusive political institutions -> inclusive economic institutions -> fairer distribution of income -> broader social groups gain strength -> a fairer arena of political competition opens up -> the income obtainable through usurping political power declines -> the incentive to recreate extractive political institutions also weakens.

- Pluralism creates an open system in which an independent press flourishes.

- But this tendency is neither inevitable nor irreversible.

- The fact that inclusive institutions in Britain and the United States survived and became more deeply rooted was due not only to the virtuous circle but also to the contingent course of history.

The Slow March of Democracy

- The response to the Black Act led ordinary Britons to become more aware of their rights. Through petitions and lobbying, they asserted those rights in the courts and in Parliament. But this degree of pluralism was still not enough to realize effective democracy.

- The 19th-century demand for suffrage in Britain

British democracy was not a gift from the elite. It was won by the people as they gained strength through a political process that unfolded over centuries, beyond England and across Britain.

The elite allowed reform because they believed it was the only way for their rule to continue, even if in a somewhat weakened form.

- The British elite did not want to tear down the painstakingly built edifice of the rule of law, and for the same reason, even while the Black Act was being enforced, they were reluctant to rule through repression and force. They believed it risked destabilizing the entire system.

Once inclusive political and economic institutions take root, the obsession with seizing power diminishes.

- In early 19th-century Britain, the elite had far less to lose thanks to the development of inclusive economic institutions.

- Universal suffrage, equal electoral districts, the ballot (secret ballot), the Representation of the People Act (1918)

The Gradual Cycle of Inclusive Institutions

- One important result of the First Reform Act was the repeal of the Corn Laws in 1846.

1871: introduction of a merit-based civil service system that allowed ordinary people to become civil servants through examinations; it carried on the efforts toward centralization and state-building that had begun under the Tudor dynasty.

- Repeal of the Master and Servant Acts, which had provided employers with grounds to restrict workers’ mobility.

- Expansion of public services, expansion of education

- Britain’s virtuous-circle transformation was gradual. There was conflict at every stage of progress, and the outcomes were contingent.

- A major advantage of gradual change: less backlash from the elite, and prevention of reckless leaps into the unknown (such as the revolutions in France or Russia).

- The aspirations of many who wanted a more equal system than the Russian Empire ended up producing an even more brutal and evil one-party dictatorship.

The reason gradual reform was difficult in France and Russia was that pluralism was absent and conditions were highly extractive. What made gradual change possible, and even desirable, in Britain was precisely the pluralism that sprouted from the Glorious Revolution and the rule of law introduced along with it.

Britain’s gradual process of political reform was more successful because its gradual nature made it all the stronger, harder to resist, and ultimately more durable.

Breaking the Trusts

- In the mid-19th century, the United States saw extractive economic institutions such as the Robber Barons and trusts.

- Organized resistance by those who opposed their domination of industry: the Populist movement -> the Progressive movement

1887 Interstate Commerce Act

1890 Sherman Antitrust Act

- The key political force that strengthened antitrust efforts and federal industrial regulation was the farming electorate.

- Roosevelt was the central figure of the Progressive movement that sought to break machine politics; and there was a recognition that although concentration in economic activity and combinations of capital should not be prohibited, reasonable supervision and control in some form were necessary.

- William Taft: breakup of Standard Oil in 1911, introduction of the federal income tax in 1913

- Woodrow Wilson, elected in 1912, and “The New Freedom”: the Clayton Antitrust Act in 1914, and the creation of the Federal Trade Commission to enforce the Clayton Act

For inclusive economic institutions to take root, it is not enough simply to have markets. What is needed is an inclusive market that creates a fair competitive environment and economic opportunities for the majority of participants.

This is exactly what a virtuous circle is. Inclusive economic institutions provide the nourishment for inclusive political institutions to flourish, and inclusive political institutions restrain efforts to deviate from inclusive economic institutions.

- The role of the free press, which broadly empowers society and thus generates a virtuous circle, is also important: muckrakers.

Under inclusive political institutions, a free press flourishes, and the free press widely publicizes threats to inclusive political and economic institutions, stirring resistance.

Attempts at Judicial Reform

- F.D. Roosevelt’s fireside chats: “...that the private contractual rights insisted upon by four justices are far more sacred than the fundamental ideals of the Constitution for establishing a sustainable nation...” “...the U.S. Constitution in fact never granted the Supreme Court the authority to challenge the constitutionality of legislation...” “...the Supreme Court acted not as a judicial body but as though it were a policymaking body...”

- Congress rejected Roosevelt’s judicial reform bill. This was a compromise produced not only by limits on presidential power but also by Supreme Court decisions upholding the Social Security Act and the National Labor Relations Act as constitutional.

Inclusive political institutions not only check major moves away from inclusive economic institutions, but also put the brakes on attempts that would undermine the continuity of the political system itself; the force that restrained Roosevelt was the power of the virtuous circle.

- The U.S. Senate and House of Representatives thought much like Britain’s political elites: if the president damaged judicial independence and upset the balance of power in government, they themselves might not remain safe, and even pluralistic political institutions could be threatened.

- Opposite examples: President Fujimori of Peru, President Chávez of Venezuela

The Case of Argentina

1946: Perón became the first Argentine president elected through democratic procedures.

- When Perón won, lawmakers in the lower house who followed him introduced impeachment motions against three or four Supreme Court justices.

- After Perón reshuffled the Supreme Court as he pleased, it became customary in Argentina for a new president to handpick the justices directly.

- On the matter of the Supreme Court, democratic governments and military regimes were not very different in attitude.

- What blocked Carlos Menem’s attempt to amend the constitution for a third term was not Argentina’s political institutions but a faction within the Peronist Party that fought against his one-man domination.

- Unlike U.S. legislators, Argentine lawmakers did not fear that their own position might someday be threatened and readily damaged the independence of the Supreme Court; under extractive institutions, the returns from undermining the Court are so high that they believe the potential gains more than offset the risks.

Positive Feedback and the Virtuous Circle

Inclusive political and economic institutions do not arise on their own. They are often the product of intense conflict between elites who resist economic growth and political change and groups that seek to limit the political and economic power of existing elites.

No one can predict the outcome of political conflict, and looking back on history it is easy to assume many events were inevitable, but the path history takes is always contingent. Yet once inclusive political and economic institutions take root, they tend to repeat positive feedback and form a virtuous circle, creating conditions in which such institutions are more likely to endure and expand.

- The operating mechanisms of the virtuous circle:

1. the logic of pluralistic political institutions

2. the way inclusive political institutions and inclusive economic institutions rely on and expand one another

3. a free press

Chapter 12. The Vicious Circle

Extractive Institutions in Sierra Leone

- After Sierra Leone’s independence, Siaka Stevens, elected in the 1967 election, removed railroad lines in regions that were bases of the opposing party.

- The Stevens regime was an extension of British colonial rule.

- As part of indirect rule, Britain made paramount chiefs lifetime officeholders. Even today, the power to levy taxes remains with paramount chiefs. Private property rights in land remain insecure.

- Through the Sierra Leone Selection Trust, Britain monopolized diamonds and handed them to De Beers; after independence, Stevens nationalized that trust and then privatized it vs. Australia’s 19th-century mining license tax system; the diggers later formed a powerful political force and contributed to the expansion of voting rights.

The Mechanism of the Vicious Circle

- Sierra Leone suffered under indirect rule; indirect colonial rule and the power thereby acquired by paramount chiefs overturned the country’s existing political order.

- Chiefs who had once been elected turned into hereditary aristocrats. Lifetime chiefs wielded power.

- This situation continued even after independence.

- Stevens focused on weakening the military, which could threaten his power; this later became the cause of the downfall of his regime.

- Why the vicious circle repeats:

Extractive economic institutions lay the foundation for the continued survival of extractive political institutions.

Extractive political institutions provide no means of checking the abuse of power.

- Another mechanism of the vicious circle: it enlarges the spoils of the power struggle. This greatly increases the likelihood of internal conflict to seize power and claim those spoils.

The extractive institutions inherited by many African countries from colonial powers planted the seeds of power struggles and civil wars.

From Encomienda to Land Expropriation

- The case of Guatemala

- After long years of dictatorship collapsed, the Liberal Party came to power. But while leaving extractive institutions in place, it pushed ahead with land privatization; land communally owned by villages or owned by the government was seized by a small elite.

- Guatemala: repartimiento (forced labor) + libreta (labor booklet) + various vagrancy laws

- Guatemala’s elites ruled through military dictatorship, and the real power lay with the elites.

- The extractive character of institutions, which was the result of the vicious circle, did not change. Even though the form of exploitation changed, the extractive nature of the institutions and the essence of the elite remained the same.

Extractive political institutions supported extractive economic institutions, which in turn made extractive political institutions even more entrenched and became the basis on which the same elite could retain power.

From Slavery to Jim Crow

- After the American Civil War, political and economic reforms were imposed by force, but because extractive institutions did not disappear, this did not lead to economic prosperity.

- Slavery led to Jim Crow; it lasted for nearly a century, until the transformative force of the civil rights movement began.

- Plantation-style agriculture dependent on low wages persisted.

- Even after the abolition of slavery and the granting of Black suffrage, the political and economic trajectory of the South did not change because Black political power and economic independence remained negligible.

- More than 600,000 people died in the Civil War, but the planter elite suffered little (a law exempted one owner from military service for every 20 slaves owned).

- To disenfranchise Black voters, new poll taxes and literacy tests for voting were introduced; a one-party Democratic dictatorship was established in which a small planter elite held political power in its grip.

- These institutions began to weaken after World War II, and the civil rights movement dismantled the political foundations of the old order.

- Only after these institutions disappeared in the 1950s and 1960s did the South rapidly converge with the North.

The vicious circle stems from extractive political institutions.

African History and the Iron Law of Oligarchy

1974: Ethiopia’s Solomonic dynasty was overthrown by a military coup.

- The “Derg” revolutionary committee that carried out the coup (a group of Marxist military officers). Among them, Major Mengistu became the new emperor.

- German sociologist Robert Michels: the iron law of oligarchy

The logic of oligarchy, and indeed of virtually all hierarchical organizations, allows the same group to restore its position not only when it is in power but even when a completely different group has taken power.

- Laurent Kabila, who ended Mobutu’s regime in Zaire, established a government just as corrupt.

- Ethiopia’s Mengistu regarded famine as a political means of weakening opposition forces.

Three Factors Behind the Emergence of More Inclusive Political Institutions After the Glorious Revolution and the French Revolution

1. a new merchant and business class

2. a broad coalition

3. a tradition of parliament and shared power

- Sierra Leone, Ethiopia, and the Congo had no traditional historical institutions capable of checking those who sought to seize power. Nor did any rising merchants, businesspeople, or entrepreneurs emerge who might support a new regime, demand secure private property rights, and call for an end to existing extractive institutions. Under colonial rule, extractive economic institutions had become so pervasive that there was no room left for entrepreneurship or business opportunities. In particular, because the returns to holding power were enormous, shameless people were drawn to pursue it.

Negative Feedback Loops and the Vicious Circle

- Inclusive institutions take root through a virtuous-circle process; at first they may have only limited inclusive characteristics and may at times be fragile, but conditions are created for positive feedback loops to continue, and over time they gradually become more inclusive.

- England is a typical case of the virtuous circle; at the time of the Glorious Revolution, the groups with formal representation were only a tiny portion of the total population, but what mattered was that they had a pluralistic character; once that pluralistic tendency took hold, institutions too developed a tendency over time to become more inclusive.

Once inclusive institutions are established, those same factors do not necessarily have to come together again for them to endure. It is true that much still depends on contingency, but the virtuous-circle process creates conditions under which inclusive institutions can be maintained and can lead society toward a stronger inclusive character.

History is not destiny, and the vicious circle is not an immortal chain that can never be broken. But it is certainly remarkably resilient.

Extractive economic institutions in turn create the foundation for the survival of extractive political institutions.

Under extractive political institutions, there are almost no checks on the exercise of power, so institutions capable of constraining a new group that topples the previous dictator and seizes power from using or abusing that power cannot emerge either.

The iron law of oligarchy is not a true law. It does not always hold, like a law of physics. As the Glorious Revolution in England and the Meiji Restoration in Japan show, it does not signify an unavoidable fate.

The key factor seen in the Glorious Revolution and the Meiji Restoration, where major steps toward inclusive institutions began, is that a broad coalition gained strength, determined to fight absolutist regimes and replace absolutist institutions with inclusive and pluralistic ones. When a broad coalition carries out a revolution, the likelihood also increases that more pluralistic political institutions will emerge.

The reason the iron law of oligarchy was more likely to operate in Sierra Leone and Ethiopia was not only that existing institutions were extremely extractive, but also that Sierra Leone’s independence movement and Ethiopia’s Derg coup were not revolutions of such broad coalitions; they were merely seizures of power by individuals and groups desperate to take control of the reins of exploitation themselves.

The vicious circle has an even more destructive aspect. Under extractive institutions, which produce enormous social inequality and promise immense wealth and absolute power to those who seize the regime, many forces become willing to fight to obtain control of the regime and the institutions.

Extractive institutions not only increase the likelihood that an even more extractive next regime will emerge, but also tend to foster constant internal strife and civil war. Such civil wars cause tremendous human suffering and also sweep away whatever efforts at centralization had been built up.

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Original title: <국가는 왜 실패하는가> 11장, 12장

Author: Jayujuui ipmun dokseotoronmoim

Date: 2024-12-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=reading01&pn=1&idx=27147