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An “Extraction Economy” is a concept from economics that refers to nation that derives most of it’s productivity from non-renewable resources, with the implication that elites are skimming a certain percentage off the top, and instead of investing that money in productive enterprises, spend it on non-productive activities instead. There is a new book out that takes this concept and uses it to explain why some countries seem mired in a permanent state of poverty. It’s “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” by Daron Acemoglu and James Robinson.

Based on fifteen years of original research Acemoglu and Robinson marshall extraordinary historical evidence from the Roman Empire, the Mayan city-states, medieval Venice, the Soviet Union, Latin America, England, Europe, the United States, and Africa to build a new theory of political economy with great relevance for the big questions of today.

Daron Acemoglu and James Robinson conclusively show that it is man-made political and economic institutions that underlie economic success (or lack of it). Korea, to take just one of their fascinating examples, is a remarkably homogeneous nation, yet the people of North Korea are among the poorest on earth while their brothers and sisters in South Korea are among the richest. The south forged a society that created incentives, rewarded innovation, and allowed everyone to participate in economic opportunities. The economic success thus spurred was sustained because the government became accountable and responsive to citizens and the great mass of people. Sadly, the people of the north have endured decades of famine, political repression, and very different economic institutions—with no end in sight. The differences between the Koreas is due to the politics that created these completely different institutional trajectories. (http://www.amazon.com/...)

Acemoglu and Robinson are economists, the first at MIT and the latter at Harvard. Both are well known for their academic publications and specialize in developing economies. This time, however, they are writing for the popular audience, and “Why Nations Fail” is well-written and easy to read. They have a very specific idea in mind, and spell it out very clearly:
In this book we will argue that the Egyptians in Tahrir Square, not most academics and commentators, have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that has organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it, such as the $70 billion fortune apparently accumulated by ex-president Mubarak. The losers have been the Egyptian people, as they only to well understand.

We’ll show that this interpretation of Egyptian poverty, the people’s interpretation, turns out to provide a general explanation for why poor countries are poor. Whether it is North Korea, Sierra Leone, or Zimbabwe, we’ll show that poor countries are poor for the same reason that Egypt is poor. Countries such as Great Britain and the United States because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities. We’ll show that to understand why there is such inequality in the world today we have to delve into the past and study the historical dynamics of societies. We’ll see that the reason Britain is richer than Egypt is because in 1688, Britain (or England, to be exact) had a revolution that transformed the politics, and thus the economics of the nation. People fought for, and won, more political rights, and they used them to expand their economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the industrial revolution (Why Nations Fail, Acemoglu and Robinson, 2012).

They themselves do not focus on the United States, except as an example of a rich nation that got inclusive politics right. But the implications are obvious to anyone, especially in light of the changes in the American political system since the 1970’s that have been well documented in “Winner Take All Politics” and “Republic, Lost” (see http://dmarkkey.weebly.com/). The key point is that politics drive economics, and changes in the political process will cause corresponding changes in the economic structure. Acemoglu and Robinson focus on the positive side of this (nations can improve their average standard of living by becoming more “inclusive”), but again, the obvious implication is that the reverse must also be true: as a nation changes from inclusive to more exclusive, economic opportunities will disappear and productivity will fall. The further implication, that an elite class might deliberately undermine political inclusion in order to begin “extracting” more wealth for themselves, is a focus of several different chapters which outline how political institutions can become more extractive over time, essentially reserving wealth for those in power, but again they do not apply this to America.

Other commentators have not been so coy. Hoyt Hilsman at the Huffington Post wrote in his review of the book:

The most pressing thesis of Why Nations Fail is that economic success depends on a political system -- and in particular political leadership -- that is the most inclusive. This is especially true in the emerging global economy, where technology has opened global markets, allowing greater access to millions of people. Greater inclusion has meant more growth, and nations around the world are benefiting.

However, in the United States, we are still having a debate not about greater inclusion, but about increasing the power and exclusivity of the economic and political elite. From immigration to health care and education reform, the Republicans are arguing for restricting access not only to the poor, but chiefly to the middle class. At the same time, they are arguing for a greater concentration of wealth among the elites through everything from lower tax rates and unrestricted campaign donations to limiting access to health care and educational opportunity (http://www.huffingtonpost.com/...).

This is “Buttonwood” at the Economist:
There are two potential candidates for extractive elites in Western economies. The first is the banking sector. The wealth of the financial industry gives it enormous lobbying power, including as contributors to American presidential campaigns or to Britain’s ruling parties. By making themselves “too big to fail”, banks ensured that they had to be rescued in 2008.
Much of current economic policy seems to be driven by the need to prop up banks, whether it is record-low interest rates across the developed world or the recent provision of virtually unlimited liquidity by the once-staid European Central Bank. The long-term effects of these policies, which may be hard to reverse, are difficult to assess.

It is tougher to argue that the financial sector has inhibited growth in other areas of the economy... (http://www.economist.com/...)

In fact, in the wake of the 2008 recession, it’s not that tough. Damn near the entire global economy collapsed due to the poor judgment and unethical practices of securities brokers. That in turn was powerfully enabled by, of course, government deregulation, sloppy oversight and inaccurate ratings by government and private sector risk management experts, which in their turn have been driven by the increased strength and influence of the professional lobbying industry, and their wealthy clients. In other words, as America’s governing institutions have become more exclusive, the economy has become more extractive. In a study they published in 2009, some political scientists led by Frank Baumgartner presented data that the issues that the public consider most important are not the same issues that lobbyists focus their resources on, which largely determines political activity. They write “It may be that political systems built around majoritarianism work better for lower-income citizens. It is certainly the case that in the United States… inequities… are sharply exacerbated by the organizational bias of interest group politics.” (http://www.unc.edu/...). It’s striking how the research by Acemoglu and Robinson on developing economies parallels the research by Baumgartner and his colleagues on the United States.

The rise of interest group politics over the past thirty years is turning the United States into an exclusive political system and an extractive economy. Doing something about it is going to be tough. As Baumgartner’s research illustrates, the lobbying community so strongly reflects elite interests that the status quo is unlikely to change unless the balance of power dramatically shifts toward the concerns of average Americans. Perhaps the only chance to accomplish that is amending the Constitution to overturn the Citizens United ruling. You can read more about that effort here:  https://www.facebook.com/...

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