Why Nations Fail

Party, it was impossible to fundamentally change the basic
incentives that people faced, bonuses or no bonuses.
Since its inception, the Communist Party had used not just
carrots but also sticks, big sticks, to get its way.
Productivity in the economy was no different. A whole set of
laws created criminal offenses for workers who were
perceived to be shirking. In June 1940, for example, a law
made absenteeism, defined as any twenty minutes
unauthorized absence or even idling on the job, a criminal
offense that could be punished by six months’ hard labor
and a 25 percent cut in pay. All sorts of similar punishments
were introduced, and were implemented with astonishing
frequency. Between 1940 and 1955, 36 million people,
about one-third of the adult population, were found guilty of
such offenses. Of these, 15 million were sent to prison and
250,000 were shot. In any year, there would be 1 million
adults in prison for labor violations; this is not to mention the
2.5 million people Stalin exiled to the gulags of Siberia.
Still, it didn’t work. Though you can move someone to a
factory, you cannot force people to think and have good
ideas by threatening to shoot them. Coercion like this might
have generated a high output of sugar in Barbados or
Jamaica, but it could not compensate for the lack of
incentives in a modern industrial economy.
The fact that truly effective incentives could not be
introduced in the centrally planned economy was not due to
technical mistakes in the design of the bonus schemes. It
was intrinsic to the whole method by which extractive
growth had been achieved. It had been done by
government command, which could solve some basic
economic problems. But stimulating sustained economic
growth required that individuals use their talent and ideas,
and this could never be done with a Soviet-style economic
system. The rulers of the Soviet Union would have had to
abandon extractive economic institutions, but such a move

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would have jeopardized their political power. Indeed, when
Mikhail Gorbachev started to move away from extractive
economic institutions after 1987, the power of the
Communist Party crumbled, and with it, the Soviet Union.
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OVIET
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NION
was able to generate rapid growth even
under extractive institutions because the Bolsheviks built a
powerful centralized state and used it to allocate resources
toward industry. But as in all instances of growth under
extractive institutions, this experience did not feature
technological change and was not sustained. Growth first
slowed down and then totally collapsed. Though ephemeral,
this type of growth still illustrates how extractive institutions
can stimulate economic activity.
Throughout history most societies have been ruled by
extractive institutions, and those that have managed to
impose some extent of order over the countries have been
able to generate some limited growth—even if none of
these extractive societies have managed to achieve
sustained growth. In fact, some of the major turning points
in history are characterized by institutional innovations that
cemented extractive institutions and increased the authority
of one group to impose law and order and benefit from
extraction. In the rest of this chapter, we will first discuss the
nature of institutional innovations that establish some
degree of state centralization and enable growth under
extractive institutions. We shall then show how these ideas
help us understand the Neolithic Revolution, the
momentous transition to agriculture, which underpins many
aspects of our current civilization. We will conclude by
illustrating, with the example of the Maya city-states, how
growth under extractive institutions is limited not only
because of lack of technological progress but also
because it will encourage infighting from rival groups
wishing to take control of the state and the extraction it
generates.