False economy What’s in it for me? Understand what makes the

Growth under extractive institutions isn’t 
impossible, but it’s hardly sustainable.
Whichever way you square it, the Soviet Union 
can by no definition said to have been a country 
that fostered inclusive political or economic 
institutions.
That said, from its genesis right through to the 
1970s, its success in certain spheres was 
unquestionable. Its society was innovative, and it 
sent the first cosmonaut into space. Its economy 
also boomed; the annual average growth rate 
was 6 percent between 1928 and 1960.
One reason behind such growth was that the 
Soviets had taken over countries that had 
remained 
massively 
underdeveloped 
for 
centuries. In the Soviet Republics, the feudal 
order had only recently been jettisoned. 
Consequently, the re-allocation of resources 
from the agricultural sector to the more 
productive industrial sector made a lot of sense.
The result was massive economic growth – 
surprising on closer inspection, as you might not 
expect such growth to happen within extractive 
economic institutions. Property rights were few, 
and workers risked incarceration if found 
slacking. These conditions were coupled with an 
extractive political institution, namely a ruthless 
and murderous single-party dictatorship.
Needless to say, economic success built on 
such extractive institutions isn’t sustainable.
Once resources had been allocated to more 
efficient use, opportunities for growth were few. 

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Additionally, the economic system wasn’t geared 
toward genuinely engendering innovation and, 
with it, growth.
The reasons for this are clear: extractive 
economic systems don’t incentivize work in the 
right way. Governing elites find themselves 
attempting 
to 
continuously 
“correct” 
accompanying forces in their nation’s economy. 
And along the way, mistakes are sure to be 
made.
In 1956, for instance, the Soviets introduced 
innovation bonuses, which were linked to a 
given invention’s productivity. However, they 
calculated productivity against a firm’s total 
wage bill. That meant that labor-saving 
innovations could actually lose you money, since 
innovation reduced the wage bill!
Another feature of extractive systems is that 
leaders discourage creative destruction. That’s 
because innovation – of whatever sort, and no 
matter how much it fosters growth – is a direct 
threat to an elite’s position.
Finally, countries with extractive political 
systems are prone to elite infighting, which 
causes instability and limited growth. That’s 
because everyone can see the massive rewards 
and riches that can be harvested once absolute 
power is achieved. Everyone wants a bite at that 
cherry.