Why Nations Fail: The Origins of Power, Prosperity, and Poverty

P
OSITIVE
 F
EEDBACK AND
 V
IRTUOUS
 C
IRCLES
Inclusive economic and political institutions do not emerge by
themselves. They are often the outcome of significant conflict
between elites resisting economic growth and political change and
those wishing to limit the economic and political power of existing
elites. Inclusive institutions emerge during critical junctures, such as
during the Glorious Revolution in England or the foundation of the
Jamestown colony in North America, when a series of factors weaken
the hold of the elites in power, make their opponents stronger, and
create incentives for the formation of a pluralistic society. The
outcome of political conflict is never certain, and even if in hindsight
we see many historical events as inevitable, the path of history is
contingent. Nevertheless, once in place, inclusive economic and
political institutions tend to create a virtuous circle, a process of
positive feedback, making it more likely that these institutions will
persist and even expand.
The virtuous circle works through several mechanisms. First, the
logic of pluralistic political institutions makes usurpation of power by
a dictator, a faction within the government, or even a well-meaning
president much more difficult, as Franklin Roosevelt discovered when
he tried to remove the checks on his power imposed by the Supreme
Court, and as Sir Robert Walpole discovered when he attempted to
summarily implement the Black Act. In both cases, concentrating
power further in the hands of an individual or a narrow group would
have started undermining the foundations of pluralistic political
institutions, and the true measure of pluralism is precisely its ability

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to resist such attempts. Pluralism also enshrines the notion of the rule
of law, the principle that laws should be applied equally to everybody
—something that is naturally impossible under an absolutist
monarchy. But the rule of law, in turn, implies that laws cannot
simply be used by one group to encroach upon the rights of another.
What’s more, the principle of the rule of law opens the door for
greater participation in the political process and greater inclusivity, as
it powerfully introduces the idea that people should be equal not only
before the law but also in the political system. This was one of the
principles that made it difficult for the British political system to
resist the forceful calls for greater democracy throughout the
nineteenth century, opening the way to the gradual extension of the
franchise to all adults.
Second, as we have seen several times before, inclusive political
institutions support and are supported by inclusive economic
institutions. This creates another mechanism of the virtuous circle.
Inclusive economic institutions remove the most egregious extractive
economic relations, such as slavery and serfdom, reduce the
importance of monopolies, and create a dynamic economy, all of
which reduces the economic benefits that one can secure, at least in
the short run, by usurping political power. Because economic
institutions had already become sufficiently inclusive in Britain by the
eighteenth century, the elite had less to gain by clinging to power
and, in fact, much to lose by using widespread repression against
those demanding greater democracy. This facet of the virtuous circle
made the gradual march of democracy in nineteenth-century Britain
both less threatening to the elite and more likely to succeed. This
contrasts with the situation in absolutist regimes such as the Austro-
Hungarian or Russian empires, where economic institutions were still
highly extractive and, in consequence, where calls for greater political
inclusion later in the nineteenth century would be met by repression
because the elite had too much to lose from sharing power.
Finally, inclusive political institutions allow a free media to
flourish, and a free media often provides information about and
mobilizes opposition to threats against inclusive institutions, as it did

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during the last quarter of the nineteenth century and first quarter of
the twentieth century, when the increasing economic domination of
the Robber Barons was threatening the essence of inclusive economic
institutions in the United States.
Though the outcome of the ever-present conflicts continues to be
contingent, through these mechanisms the virtuous circle creates a
powerful tendency for inclusive institutions to persist, to resist
challenges, and to expand as they did in both Britain and the United
States. Unfortunately, as we will see in the next chapter, extractive
institutions create equally strong forces toward their persistence—the
process of the vicious circle.

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