'Why Nations Fail': Can elites choke American prosperity?

Monitor managing editor Marshall Ingwerson talks with 'Why Nations Fail' co-author Daron Acemoglu.

As American inequality rises, is the economy at risk of elite interest groups gaining political power and stifling competition?

Throughout history, this is how prosperous nations have lost their edge, according to “Why Nations Fail” by MIT economist Daron Acemoglu and Harvard political scientist James Robinson. Controlling elites block innovation to protect their own interests and growth eventually stalls.

Could that happen here?

“The US is highly innovative and shows no tendency to become less so,” says Dr. Acemoglu, "but I think there are some worrying signs about its political pluralism.”

The power of money in politics in the form of political contributions and organized interest groups seems to have risen in recent decades over the voice of common citizens, he says.

Americans on the left worry about the self-serving political clout of Wall Street and big banks, while Americans on the right worry about the self-serving clout of big public employee unions like Wisconsin’s teachers.

“Those are well-placed fears. But both historically and in the United States, the bigger threat has come not from the unions but from specific groups of employers.  Only in a few societies – for example, in England in the 1970s – have unions become so strong and so well organized and presented a uniform enough interest to really block technological change.”

The prime example is the political power of the financial industry, illustrated by the skill in which it came through the last financial crash without the significant rule changes that usually follow big crashes.

“The financial crisis has come and gone, to some degree, but the problematic organization and the problematic influence of the financial industry hasn’t gone."

Before an economy can become very “extractive,” that is, controlled by a group for its own benefit, the group first needs to consolidate political power.

A historical object lesson for the US might be the Venetian Republic during the Middle Ages. At the time, Venice was arguably the richest place on earth. A kind of financial innovation made it not only a trading hub but a generator of upward mobility for spreading new wealth to new players.

After centuries of growth, wealthy families eventually found ways to close political power off from newcomers and used it to close off newcomers from the economy as well. That, according to “Why Nations Fail,” is “how Venice became a museum.”

“In Venice,” explains Acemoglu, “things started unraveling not when economic inequality increased but when political inequality increased – when a particular group of merchant families worked to seal the system to start monopolizing political power.”

Despite the rise of money in politics in the US today, there are still plenty of signs of pluralism and competition as well.

“There is an open media,” says Acemoglu, “not controlled by anybody or by an interest. And though the US public has become somewhat apolitical, we have seen with the Tea Party and Occupy movement that there is a lot of political energy, and it is hard to contain that energy even if people wanted to suppress it.”

Further conversations with Daron Acemoglu, coauthor of “Why Nations Fail”:

Marshall Ingwerson is the Monitor's managing editor.