Daron Acemoglu’s New Institutional Economics is criticized for failing to align with key historical and contemporary realities. Photo: IC PHOTO

In their book Why Nations Fail, Daron Acemoglu and James Robinson argue that a necessary historical condition for a nation’s economic prosperity is the adoption of an inclusive political institution, such as a democratic election system with mass participation, while the fundamental reason for a nation’s economic underdevelopment is the adoption of an extractive political institution, such as a monarchy. Specifically, they suggest that only under inclusive political institutions—where the majority of people participate in political decision-making—can inclusive economic institutions (such as the protection of private property rights) be established and guaranteed, which is the only pathway that leads to economic prosperity.

While this argument may appear plausible and even conventional, it fails to align with key historical and contemporary realities. It contradicts the industrialization history of capitalist European nations, the experiences of developing countries subjected to Western-imposed democratic institutions after World War II, and the lessons from Russia’s failed market-oriented and democratic reforms. Additionally, it does not account for the deindustrialization seen in Latin American countries following the adoption of the Washington Consensus, nor does it correspond with the history or current state of industrialization in the United States itself.

Logical fallacy

Although Acemoglu accentuated state capacity in a series of articles and books, his definition of the concept is vague. Moreover, he has not clarified the relationship between state capacity and inclusive political and economic institutions, or how these elements historically interacted to drive industrialization. The crux of the issue lies in Acemoglu’s failure to clearly define the basic concept of “inclusiveness.” Instead, he retroactively infers whether a country’s institutions are inclusive or extractive based on the success or failure of its economic development. This approach amounts to using a “magnifying glass” to examine those economically successful countries in order to highlight their “inclusive” elements and deliberately ignoring the “extractive” elements present within their systems. At the same time, he identifies “extractive” institutional elements from economically unsuccessful countries while readily disregarding their “inclusive” institutional aspects. Such selective reasoning represents the typical behavior of “shooting the arrow before drawing the target.”

Can Acemoglu deny that “gender equality” is a typical feature of inclusive political institutions? Yet, it was socialist countries that first proposed and universally implemented this principle. Can he deny that “high tax rates” are a hallmark of extractive institutions? During Britain’s industrialization, tax rates were as high as 20% for extended periods, while the average tax rate in Qing Dynasty China (1644–1911) was a mere 4% over comparable periods. Can Acemoglu deny that colonial plunder and genocide are major features of extractive institutions? Among the developed Western nations that Acemoglu regards as exemplars of inclusive institutions and property rights protection, which one did not rely on colonial plunder for its economic prosperity? As Karl Marx wrote: “The discovery of gold and silver in America, the extirpation, enslavement, and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalized the rosy dawn of the era of capitalist production.”

Over the past half-century, Western university economics departments have primarily focused on training economists with mathematical tools, seldom, if ever, including the history of capitalism—particularly the history of industrialization—as a required or even elective course for PhD students. This has given rise to an interesting phenomenon: while historians, including economic historians, overwhelmingly oppose and criticize Acemoglu’s New Institutional Economics for its distorted interpretation of history, his books and articles are widely popular within the economics community, which emphasizes mathematics over history, to the extent that he was even awarded the 2024 Nobel Prize in Economics.

Contradicting with historical facts

In the cases discussed by Acemoglu and others, their theories often fail to align with historical facts. In a famous article in 2001, they used the history of American colonization centuries ago to support their theory. According to them, South America lags behind North America at present in terms of economic development primarily because European colonists only engaged in plunder, rather than settling, in South America due to widespread malaria. Consequently, colonists failed to establish an “excellent” system in South America that emulated those of their motherlands, leading to the widespread poverty seen in South America today. In contrast, the “excellent” European institutions successfully took root in North America, making it more prosperous than South America today. This theoretical explanation exposes their “ignorance” of colonial history. Today, the majority of the South American population are of mixed descent, while the Native Americans in North America are almost completely extinct. This is precisely because the European colonists were willing to intermarry with the indigenous people in South America, whereas colonists in North America engaged in mass slaughter of North American indigenous peoples. So, Mr. Acemoglu, were Western colonists more tolerant in South America or in North America?

Furthermore, the explanation provided by Acemoglu and others is not applicable to the development of many countries in modern times, either. Former colonies, including Peru, Brazil, Tunisia, the Philippines, India, and many other Latin American, African, Central Asian, and South Asian countries, either imitated or had democratic institutions imposed upon them by Western countries, retaining private property protection institutions aligned with the interests of the ruling elites. However, these countries underperformed economically over long periods. Similarly, many nations that briefly adopted planned economies in resistance to Western capitalism did not experience economic take-off even after adopting democratic election systems and market-oriented reforms in the 1990s. In fact, the “Four Asian Tigers” behind the “East Asian miracle” did not experience economic take-off under “Western democracy.” They gradually adopted Western democratic institutions only after their economies had already taken off. Today, different states and cities in the U.S. adopt the same political and economic institutions, including similar private property protections, yet income levels and economic outcomes vary dramatically. Even within a single city, per capita income can differ significantly between neighborhoods. Is this variation due to differing political and economic institutions, or legal and private property protections in these neighborhoods?

In fact, sufficient historical data provided by historians has revealed numerous “extractive” institutional elements within the industrialization histories of Western countries, alongside a significant absence of “inclusive” ones. History requires a re-examination of the true sources behind the industrial success of Western nations and the identification of the serious theoretical flaws in Acemoglu’s New Institutional Economics.

As early as the 16th to 19th centuries, contemporary developed Western countries had achieved economic prosperity and industrialization through “fiscal-military state” construction and military mercantilism national development strategies. During this period, their political institutions were absolute monarchy. Even the founding fathers of the United States openly opposed the establishment of a democratic system with broad popular participation, opting instead for a non-democratic elite republican system. These countries only adopted universal suffrage in the 20th century, long after industrialization had been achieved. For example, Britain adopted universal suffrage in 1928, while France, Italy, and Japan in the 1940s, and the U.S. in 1965.

Moreover, prior to and in their early stages of industrialization, many developed countries did not protect property rights as effectively as many developing countries do today. Economist Ha-Joon Chang argues that what matters more for economic development is not the indiscriminate protection of all property rights, but the conditions under which specific property rights are protected. In fact, in those countries now considered developed, legal frameworks governing economic activities (including contract law, company law, tax law, land law, intellectual property law, financial auditing and disclosure laws, etc.) were either non-existent or insufficient prior to the completion of the Industrial Revolution.

Law enforcement was similarly lacking, and for many of these countries, the implementation of these laws was not fully realized until the early 20th century, as the Second Industrial Revolution was maturing. As American historian Sven Beckert aptly wrote: “The first industrial nation, Great Britain, was hardly a liberal, lean state with dependable but impartial institutions as it is often portrayed. Instead it was an imperial nation characterized by enormous military expenditures, a nearly constant state of war, a powerful and interventionist bureaucracy, high taxes, skyrocketing government debt, and protectionist tariffs—and it was certainly not democratic.”

Theoretical flaws

Acemoglu’s New Institutional Economics attempts to create a major myth: that democracy, private property rights, and the rule of law were the fundamental reasons and prerequisites for the economic rise of Western powers between the 16th and the 19th centuries. This myth is built on yet another falsehood—that laissez-faire policies and free trade were the ultimate recipe for the success of the European Industrial Revolution, particularly in Britain. However, this does not reflect historical facts in the slightest. In fact, no capitalist nation has ever successfully launched its own industrial revolution under a free trade policy, without strong state intervention or the mercantilist and militaristic competition that fueled global trade and market competition under armed protection. Between the establishment of the East India Company in the early 17th century and the eve of the Industrial Revolution, Britain did not adopt a free trade policy. Free trade emerged in Britain after the Industrial Revolution as a global trade strategy designed to address severe overcapacity and the resulting economic crisis. Prior to that, Britain’s national development strategy had always been rooted in trade protectionism.

Similarly, the U.S. adopted an extreme trade protectionist strategy throughout the 19th century to catch up with Europe, protecting its own manufacturing industry by imposing high tariffs on European industrial products. Only after overtaking European nations and securing manufacturing dominance did the U.S. begin to promote free trade globally, particularly in developing countries, due to its own enormous overcapacity. Long-term wars and competition for colonies among capitalist countries, including the two world wars, forced underdeveloped countries at that time to choose among three pathways in the face of the West’s huge industrial might. The first was to become a colony. The second was to emulate Japan’s Meiji Restoration by adopting militarism, war capitalism, and colonialism to rise with force. The third was to take a self-reliant industrialization path that avoids colonial exploitation and slave trade and instead embraces fairness and justice, realizing industrialization through a system for mobilizing resources nationwide, which is to say the path of socialist modernization.

Inconsistent with history and reality, Acemoglu’s New Institutional Economics has been criticized by numerous historians, and yet has gained enthusiastic support from many “blackboard economists” who lack a deep understanding of the history of Western industrialization. This represents an ironic miracle, given that the theory that earned him the Nobel Prize in Economics was developed on a blackboard within the ivory tower of academia, using data and sophisticated tools of mathematical economics, rather than being grounded in real-world industrialization history. Finally, I would like to conclude this article by quoting American economist and historian Deirdre Nansen McCloskey’s sharp comments on Acemoglu’s New Institutional Economics: Acemoglu “has gotten the story embarrassingly wrong in every important fact.”

Wen Yi is a distinguished professor from the Antai College of Economics and Management at Shanghai Jiao Tong University.