Daron Acemoglu, a Turkish-American professor of economics at MIT, was already the world’s most influential economist before he won the 2024 Nobel Prize on October 14 with his frequent collaborators James Robinson and Simon Johnson (the trio are sometimes abbreviated as AJR). He dominates his field, in terms of publications and citations, and in wider public influence. Why Nations Fail, published by Acemoglu and Robinson in 2012, has been even more influential than Thomas Piketty’s Capital in the 21st Century – mostly because Acemoglu and Robinson didn’t change their minds about their core thesis in subsequent books.
Piketty still thinks capitalism is bad and socialism is good. AJR think that the capitalism vs socialism argument is hopelessly confused. For them, economics is always downstream of politics, and what really matters is the state of a nation’s political institutions. Why Nations Fail uses the last 500 years of global history as a set of natural experiments to study how institutions generate wealth and prosperity. Why do people in Nogales, Arizona, earn three times more than people immediately across the border in Nogales, Mexico? They have the same geographic location, resources, climate and ethnic populations. Why is South Korea richer than North Korea? Why is Zimbabwe so much poorer than Botswana?
Their answer is that successful, prosperous states have a combination of inclusive institutions: property rights, the rule of law, political pluralism and open markets. No single faction or group dominates the political or legal system: there’s broad equality, economic participation, opportunity for innovation and upwards mobility. People will build new things, invent new products, create new jobs and generate an abundance of wealth. You could have a big old social democracy or a minimal neoliberal state: so long as your political institutions are inclusive and responsive, you’ll probably be okay.
What kills your economy is elite capture. When your politics is dominated by a narrow range of factions, parties or sectors, they’ll use their power to impose an extractive economy, arranged to acquire everyone else’s wealth and the value from their labour, redistributing it to themselves and their political allies. AJR provide a checklist of institutional failures: weak property rights, concentration of political power, monopolistic economic structures and lack of political accountability.
Ticking many boxes
Superficially, New Zealand does all the right things. Property rights, rule of law, democracy, open markets. We should be flourishing! And our rights and legal system are fairly robust. But we have a very concentrated political system dominated by two large, centrist parties, neither of which seems to stand for very much. Our laws around lobbying and political donations are a joke and – lo and behold – monopolies and cartel-like behaviour are endemic across our economy. The recent price surges in the wholesale energy markets and subsequent closures of companies that could no longer afford to operate are textbook cases of how oligopolies destroy economic growth.
Our governments are accountable via the electoral cycle, but the wider public sector is not. The recent report into abuse in state care demonstrated that public agencies can literally torture children and the entire system will cover it up and no one will be held accountable. Vast sums of taxpayer money disappear into complex bureaucracies, much of it flowing to private sector providers, and it’s hard to see the value from all this spending. The executive teams at the energy companies will almost certainly be rewarded for their destruction of hundreds of jobs. Contact Energy has just raised prices by 10% for 280,000 households and other energy providers look set to follow.
Two of the signifiers of elite capture and extractive economies are low productivity and mass outward migration. There’s little point in bringing new products to market or building an export business if you can get rich via political influence, making sure the government subsidises your industry, creates significant barriers to entry to reduce competition or simply gives you money. This lack of innovation delivers a low-wage economy with high prices. So, if you’re young, qualified and entrepreneurial, your best bet is to go somewhere else with more inclusive institutions and better economic prospects. We’re now into our fifth decade of productivity decline relative to the rest of the OECD, and this is getting worse. Migration of qualified workers – mostly to Australia – is now at record highs.
Lessons from Argentina
There are dramatic models of nation-state failure – Zimbabwe, North Korea – but from a New Zealand perspective, the most chilling chapters describe the economic trajectory of Argentina. One of the wealthiest nations on Earth at the beginning of the 20th century, its elites prioritised their own control of the political and economic systems, leading to sustained economic underperformance. It wasn’t run into the ground like North Korea; it just experienced sustained stagnation.
Our own sclerosis has been less obvious because successive governments oversaw a massive housing bubble to create the illusion of middle-class wealth.
There’s a lot of controversy about Acemoglu: every time he publishes a paper, dozens of economists rush off and try to refute, duplicate or expand on his work. There are many criticisms of the Why Nations Fail model, from “what about China?” to arguments about Venice’s 15th-century decline.
Economists can only ever build simplified models of the world and they’ll never apply perfectly to reality itself. But this framework of dysfunctional institutions leading to economic failure seems grimly appropriate to New Zealand, at a time in which the nation is clearly in a period of decline.
