by Prosperity;Poverty Why Nations Fail: The Origins of Power
Growth was so rapid that it took in generations of Westerners, not just Lincoln Steffens. It took in the Central Intelligence Agency of the United States. It even took in the Soviet Union’s own leaders, such as Nikita Khrushchev, who famously boasted in a speech to Western diplomats in 1956 that “we will bury you [the West].” As late as 1977, a leading academic textbook by an English economist argued that Soviet-style economies were superior to capitalist ones in terms of economic growth, providing full employment and price stability and even in producing people with altruistic motivation. Poor old Western capitalism did better only at providing political freedom. Indeed, the most widely used university textbook in economics, written by Nobel Prize–winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition there was little change in the analysis, though the two dates were delayed to 2002 and 2012.
Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way. By the 1970s, economic growth had all but stopped. The most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elites. In addition, once all the very inefficiently used resources had been reallocated to industry, there were few economic gains to be had by fiat. Then the Soviet system hit a roadblock, with lack of innovation and poor economic incentives preventing any further progress. The only area in which the Soviets did manage to sustain some innovation was through enormous efforts in military and aerospace technology. As a result they managed to put the first dog, Leika, and the first man, Yuri Gagarin, in space. They also left the world the AK-47 as one of their legacies.
Gosplan was the supposedly all-powerful planning agency in charge of the central planning of the Soviet economy. One of the benefits of the sequence of five-year plans written and administered by Gosplan was supposed to have been the long time horizon necessary for rational investment and innovation. In reality, what got implemented in Soviet industry had little to do with the five-year plans, which were frequently revised and rewritten or simply ignored. The development of industry took place on the basis of commands by Stalin and the Politburo, who changed their minds frequently and often completely revised their previous decisions. All plans were labeled “draft” or “preliminary.” Only one copy of a plan labeled “final”—that for light industry in 1939—has ever come to light. Stalin himself said in 1937 that “only bureaucrats can think that planning work ends with the creation of the plan. The creation of the plan is just the beginning. The real direction of the plan develops only after the putting together of the plan.” Stalin wanted to maximize his discretion to reward people or groups who were politically loyal, and punish those who were not. As for Gosplan, its main role was to provide Stalin with information so he could better monitor his friends and enemies. It actually tried to avoid making decisions. If you made a decision that turned out badly, you might get shot. Better to avoid all responsibility.
An example of what could happen if you took your job too seriously, rather than successfully second-guessing what the Communist Party wanted, is provided by the Soviet census of 1937. As the returns came in, it became clear that they would show a population of about 162 million, far less than the 180 million Stalin had anticipated and indeed below the figure of 168 million that Stalin himself announced in 1934. The 1937 census was the first conducted since 1926, and therefore the first one that followed the mass famines and purges of the early 1930s. The accurate population numbers reflected this. Stalin’s response was to have those who organized the census arrested and sent to Siberia or shot. He ordered another census, which took place in 1939. This time the organizers got it right; they found that the population was actually 171 million.
Stalin understood that in the Soviet economy, people had few incentives to work hard. A natural response would have been to introduce such incentives, and sometimes he did—for example, by directing food supplies to areas where productivity had fallen—to reward improvements. Moreover, as early as 1931 he gave up on the idea of creating “socialist men and women” who would work without monetary incentives. In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. It is instructive to understand how this worked. Typically a firm under central planning had to meet an output target set under the plan, though such plans were often renegotiated and changed. From the 1930s, workers were paid bonuses if the output levels were attained. These could be quite high—for instance, as much as 37 percent of the wage for management or senior engineers. But paying such bonuses created all sorts of disincentives to technological change. For one thing, innovation, which took resources away from current production, risked the output targets not being met and the bonuses not being paid. For another, output targets were usually based on previous production levels. This created a huge incentive never to expand output, since this only meant having to produce more in the future, since future targets would be “ratcheted up.” Underachievement was always the best way to meet targets and get the bonus. The fact that bonuses were paid monthly also kept everyone focused on the present, while innovation is about making sacrifices today in order to have more tomorrow.
Even when bonuses and incentives were effective in changing behavior, they often created other problems. Central planning was just not good at replacing what the great eighteenth-century economist Adam Smith called the “invisible hand” of the market. When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from ceilings.
By the 1940s, the leaders of the Soviet Union, even if not their admirers in the West, were well aware of these perverse incentives. The Soviet leaders acted as if they were due to technical problems, which could be fixed. For example, they moved away from paying bonuses based on output targets to allowing firms to set aside portions of profits to pay bonuses. But a “profit motive” was no more encouraging to innovation than one based on output targets. The system of prices used to calculate profits was almost completely unconnected to the value of new innovations or technology. Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value. To more specifically create incentives for innovation, the Soviet Union introduced explicit innovation bonuses in 1946. As early as 1918, the principle had been recognized that an innovator should receive monetary rewards for his innovation, but the rewards set were small and unrelated to the value of the new technology. This changed only in 1956, when it was stipulated that the bonus should be proportional to the productivity of the innovation. However, since productivity was calculated in terms of economic benefits measured using the existing system of prices, this was again not much of an incentive to innovate. One could fill many pages with examples of the perverse incentives these schemes generated. For example, because the size of the innovation bonus fund was limited by the wage bill of a firm, this immediately reduced the incentive to produce or adopt any innovation that might have economized on labor.
Focusing on the different rules and bonus schemes tends to mask the inherent problems of the system. As long as political authority and power rested with the Communist 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 ab
sence 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 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.
THE SOVIET UNION 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.
ON THE BANKS OF THE KASAI
One of the great tributaries of the River Congo is the Kasai. Rising in Angola, it heads north and merges with the Congo northeast of Kinshasa, the capital of the modern Democratic Republic of Congo. Though the Democratic Republic of Congo is poor compared with the rest of the world, there have always been significant differences in the prosperity of various groups within Congo. The Kasai is the boundary between two of these. Soon after passing into Congo along the western bank, you’ll find the Lele people; on the eastern bank are the Bushong (Map 6, this page). On the face of it there ought to be few differences between these two groups with regard to their prosperity. They are separated only by a river, which either can cross by boat. The two different tribes have a common origin and related languages. In addition, many of the things they build are similar in style, including their houses, clothes, and crafts.
Yet when the anthropologist Mary Douglas and the historian Jan Vansina studied these groups in the 1950s, they discovered some startling differences between them. As Douglas put it: “The Lele are poor, while the Bushong are rich … Everything that the Lele have or can do, the Bushong have more and can do better.” Simple explanations for this inequality are easy to come by. One difference, reminiscent of that between places in Peru that were or were not subject to the Potosí mita, is that the Lele produced for subsistence while the Bushong produced for exchange in the market. Douglas and Vansina also noted that the Lele used inferior technology. For instance, they did not use nets for hunting, even though these greatly improve productivity. Douglas argued, “[T]he absence of nets is consistent with a general Lele tendency not to invest time and labor in long-term equipment.”
There were also important distinctions in agricultural technologies and organization. The Bushong practiced a sophisticated form of mixed farming where five crops were planted in succession in a two-year system of rotation. They grew yams, sweet potatoes, manioc (cassava), and beans and gathered two and sometimes three maize harvests a year. The Lele had no such system and managed to reap only one annual harvest of maize.
There were also striking differences in law and order. The Lele were dispersed into fortified villages, which were constantly in conflict. Anyone traveling between two or even venturing into the forest to collect food was liable to be attacked or kidnapped. In the Bushong country, this rarely, if ever, happened.
What lay behind these differences in the patterns of production, agricultural technology, and prevalence of order? Obviously it was not geography that induced the Lele to use inferior hunting and agricultural technology. It was certainly not ignorance, because they knew about the tools used by the Bushong. An alternative explanation might be culture; could it be that the Lele had a culture that did not encourage them to invest in hunting nets and sturdier and better-built houses? But this does not seem to have been true, either. As with the people of Kongo, the Lele were very interested in purchasing guns, and Douglas even remarked that “their eager purchase of firearms … shows their culture does not restrict them to inferior techniques when these do not require long-term collaboration and effort.” So neither a cultural aversion to technology nor ignorance nor geography does a good job of explaining the greater prosperity of the Bushong relative to the Lele.
The reason for differences between these two peoples lies in the different political institutions that emerged in the lands of the Bushong and the Lele. We noted earlier that the Lele lived in fortified villages that were not part of a unified political structure. It was different on the other side of the Kasai. Around 1620 a political revolution took place led by a man called Shyaam, who forged the Kuba Kingdom, which we saw on Map 6, with the Bushong at its heart and with himself as king. Prior to this period, there were probably few differences between the Bushong and the Lele; the differences emerged as a consequence of the way Shyaam reorganized society to the east of the river. He built a state and a pyramid of political institutions. These were not just significantly more centralized than what came before but also involved highly elaborate structures. Shyaam and his successors created a bureaucracy to raise taxes and a legal system and police force to administer the law. Leaders were checked by councils, which they had to consult with before making decisions. There was even trial by jury, an apparently unique event in sub-Saharan Africa prior to European colonialism. Nevertheless, the centralized state that Shyaam constructed was a tool of extraction and highly absolutist. Nobody voted for him, and state policy was dictated from the top, not by popular participation.
This political revolution introducing state centralization and law and order in the Kuba country in turn led to an economic revolution. Agriculture was reorganized and new technologies were adopted to increase productivity. The crops that had previously been the staples were replaced by new, higher-yield ones from the Americas (in particular, maize, cassava, and chili peppers). Th
e intense mixed-farming cycle was introduced at this time, and the amount of food produced per capita doubled. To adopt these crops and reorganize the agricultural cycle, more hands were needed in the fields. So the age of marriage was lowered to twenty, which brought men into the agricultural labor force at a younger age. The contrast with the Lele is stark. Their men tended to marry at thirty-five and only then worked in the fields. Until then, they dedicated their lives to fighting and raiding.
The connection between the political and economic revolution was simple. King Shyaam and those who supported him wanted to extract taxes and wealth from the Kuba, who had to produce a surplus above what they consumed themselves. While Shyaam and his men did not introduce inclusive institutions to the eastern bank of the Kasai, some amount of economic prosperity is intrinsic to extractive institutions that achieve some degree of state centralization and impose law and order. Encouraging economic activity was of course in the interest of Shyaam and his men, as otherwise there would have been nothing to extract. Just like Stalin, Shyaam created by command a set of institutions that would generate the wealth necessary to support this system. Compared to the utter absence of law and order that reigned on the other bank of the Kasai, this generated significant economic prosperity—even if much of it was likely extracted by Shyaam and his elites. But it was necessarily limited. Just as in the Soviet Union, there was no creative destruction in the Kuba Kingdom and no technological innovation after this initial change. This situation was more or less unaltered by the time the kingdom was first encountered by Belgian colonial officials in the late nineteenth century.
