In Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Acemoglu and Robinson emphasize that the design of institutions is fundamental to economic outcomes. They illustrate this by contrasting British and Spanish colonies in the Americas. Why did one set of colonies lead to economic abundance, while the other led to relative poverty?
In the British colonies, institutions were more inclusive. This meant that not only did the sponsors back in Britain receive a share of the returns, but those actually living and working the land in North America benefited even more. If the colonial settlers worked harder or innovated, they reaped the rewards, fostering a culture of productivity and improvement.
In contrast, the Spanish colonies were designed as extractive. The Spanish elites back in Spain extracted nearly all the wealth from the colonies’ mines and plantations, leaving the native laborers destitute regardless of their efforts. These workers had little incentive to work harder, innovate, or improve their conditions since they wouldn’t benefit from any additional effort or creativity.
In the British colonies, institutions were more inclusive. This meant that not only did the sponsors back in Britain receive a share of the returns, but those actually living and working the land in North America benefited even more. If the colonial settlers worked harder or innovated, they reaped the rewards, fostering a culture of productivity and improvement.
In contrast, the Spanish colonies were designed as extractive. The Spanish elites back in Spain extracted nearly all the wealth from the colonies’ mines and plantations, leaving the native laborers destitute regardless of their efforts. These workers had little incentive to work harder, innovate, or improve their conditions since they wouldn’t benefit from any additional effort or creativity.
The extractive institutions stifled growth and innovation.
Acemoglu’s more recent work with Johnson - Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity - builds on this by examining the role of technology in economic outcomes. They argue that there is nothing automatic about technological advancements benefiting the majority. History shows periods where the elites captured the overwhelming share of productivity gains, and other periods when those gains were more broadly shared, improving the lives of workers as well as capitalists.
Focusing specifically on AI, Acemoglu is skeptical about whether its potential gains will be shared widely or remain concentrated among a few. He argues that the outcome—whether gains are broadly shared or narrowly held—will depend on deliberate policy decisions, not on the simple evolution of the technology itself or market forces.
I share Acemoglu’s sense that with economics’ small 1 to 3% annual changes, all the really fascinating progress plays out over generations and not months or years. Economic progress has deep causes and the design of institutions is even more important than the design of tools or products. It's gratifying to see that recognized by the Nobel Prize committee.
