Why Nations Fail

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

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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 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

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about and mobilizes opposition to threats against inclusive
institutions, as it did 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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