Reading Snippet - Why Nations Fail (9)

Why inclusive societies could emerge

The authors had expended large sections of the book on examples from North American colonies, Australia, Great Britain, France and Japan on how they attained inclusive societies and maintained it. Be it revolution (France), threat of low productivity among the commoners (North America and Australian), mutiny amongst the wealthy (Great Britain) or threat of sub-ordination by another world power (Japan).

The mechanisms played out in history may differ across nations, but there seems to be an underlying common link - the realisation that you either replace the incumbent as the next exploiter that extracts from a dis-incentivised base, or open up incentives to the masses by giving equal rights & obligations, so that all citizens enjoy greater power & prosperity and you dwell as one of them.

The former is a classic pre-industrial setup all too familiar in Chinese history, in which a small group of elite would overthrow the previous tyranny, set up 'good government' which distributed land and created a not-so-corrupt administration system. However, as time went, the political power would be translated into economic power in the form of monopolies (rice export, salt production & trading, wine-making & sales) while large landowners emerged and forced tenants into serfdom with the blessing of the government (the government officials were large owners themselves). The political and economic elites joined force and was preserved at the top, and factions started to fight against each other to get into that prized position. Then history repeated itself.

The latter is a recognition that either power is concentrated amongst a few and warfare ensues, or the power become more distributed and everyone is better off. This is exemplified in the Australia case - the British authorities could have exploited the prisoners by forcing them into hard labour without pay, or allow them to finish their compulsory work and then do extra fee-earning work with their 'free time'; prisoners could also own properties bought with their savings. The first scenario is analogous to a small elite (the local government) assuming great power, which would lead to low productivity among the masses and potential rebellion down the line; the second scenario (which the government eventually chose) is closer to inclusiveness and equal opportunities for all inhabitants.

This transformation in mindset is significant. If power is absolute and concentrated amongst a few, those few have little incentive to conduct creative destruction which is a risky affair - you may experiment with destructions without bearing fruits, or creative destruction may come from the masses and you become deposed. Why not enjoy the current cushy lifestyle when the others are doing the work for you? There is also little incentives among the masses as any gain would only be expropriated by the elites, so why try so hard? The hardest they would ever try was to topple the elite and replace them.

When power is centralised but not absolute (checks & balances in place and participation from everyone) and the distinction between the powerful 'elite' and the powerless and exploited 'masses' is busted, then there is no such thing as 'topple & replace the elite'. Economically, the moving away from 'absolutism' refers to the ability for citizens to enjoy the fruit of innovation or experiments - if you invent a new machine, you could profit from it; if you find a new way to farm, you could keep the extras. This gives incentives to the previous 'masses' to improve, while the previous 'elites' suddenly find that despite their loss of economic dominance over the 'masses', the greater incentives mean economic improvement and  a 'bigger pie with smaller share' which gives a bigger slice.

The former elites may have lost 'power' with the transformation, but they can also do away with the threat of being toppled; meanwhile, the 'power' is now un-entangled from economic benefits (no power, but bigger slice of the pie) and so incentives for elites to hold on to power just to protect their wealth.

In Australia, the officials realised that exploiting the prisoners to enjoy all the fruits of a small economy was inferior to opening up the rights so as to enlarge the economy and enjoy a smaller share of outcomes. When the Spaniards arrived in South America, with the wealth of precious metals and sizeable indigenous population, their calculation was different - the existing economy was large enough to live a comfortable life through exploitation, and so they did not hesitate to enslave the masses and condemn them to hard labour.