So, I just finished reading Daron Acemoglu and James A. Robinson's Why Nations Fail. The book is engagingly written, and they illustrate their basic thesis with a ton of historical anecdotes from both ancient and modern times; I think most folks would learn something from it even if they happened to disagree with the basic thesis. Though that thesis is really so simple that it would take a moron to disagree with it. Maybe someone like Bill Gates, for example (the author's response to this criticism is here).
But seriously, I actually found the thesis fairly convincing. The basic idea is just that people respond to the incentives built into the institutional structure of a country. If a nation has inclusive political and economic institutions -- which basically means enough openness, rule of law, and enough property rights that most individuals can go into business for themselves, or get involved in politics for themselves -- then folks will have an incentive to invest in new and improved enterprises and no one segment of society will come to dominate. Such nations are adaptable, are able to embrace new technologies, see sustainable long-term economic growth, and get rich. By contrast, if a nation has extractive political and economic institutions -- meaning that the economy is filled with monopolies or other protections that prevent most folks from investing, or that the corrupt government becomes primarily a way to fleece the populace and enrich the insiders -- it won't experience sustainable long-term growth. Most of the population has nothing to gain from it, and the small minority who control things has no incentive to embrace any change that could potentially undermine their current ability to capture political and economic power from the rest of the population. Hence, these nations stay poor.
That's pretty much it, thesis wise. The authors then try to use this theory to explain stuff like this map of the distribution of median income around the globe (as well as a lot of history). While there are a whole host of reasons why a simple theory like this will almost inevitably fail to adequately explain anything as complex as the distribution of global wealth, there are a couple of obvious pitfalls that the authors specifically avoid.
First, their theory doesn't convey any sense of mono-causal inevitability. In other words, they're not interested in saying, "if you have free markets instead of state control of the economy, then you get rich", or even, "if you have a democracy, then you get rich". While it's clear that they think both markets and democracy are generally good ideas, these are not the Washington Consensus droids you are looking for. In fact, there's a refreshing lack of "ism"ism in the book; in the immortal words of Deng Xiaoping they don't care whether institutions are black or white, so long as they catch the mice of providing the correct incentives. This way of looking at the question also allows you to see that different institutions within a society can be acting at cross-purposes. Some can be extractive while others are inclusive. But it also allows you to see the way institutions can resonate together and reinforce one another in feedback loops -- corrupt politics reinforcing extractive monopolies and media control, or a dynamic competitive economy generating new wealth and reinforcing a more pluralist, inclusive politics.
Since their theory isolates tendencies in a society, it enables them to explain not only why things most often stay the same -- eg. post-colonial African regimes inheriting and reusing the extractive institutions built by the British -- but why they sometimes change -- eg. North American colonies being forced to incorporate inclusive incentives amongst the colonists because there was not a dense enough native population to enslave. As a result, the theory leaves a lot of room for the contingency of critical moments as a driver of history. While this destroys its potential as a scientific theory, that strikes me as a feature, not a bug. Unless it turns out that Elon Musk is right and we are living in a simulation rather than base reality, we will never have a scientific theory of history. It also makes it dovetail pretty well with the emphasis Fukuyama placed on contingency when he tried to explain The Origins of Political Order.
Second, their theory does not pretend that growth con only happen under inclusive institutions. They explicitly discuss the many cases where it is in the interests of an extractive elite to promote growth. After all, with a bigger pie, there's more to steal. While they only mention him in the bibliography, it seems to me that this directly co-opts the stages of banditry Mancur Olson presented in Power and Prosperity. Roving bandits are the worst because they'll steal everything you've got and ride on to pillage the next town. The state is more like a stationary bandit, who is a little better because he shoots himself in the foot if he steals too much and causes a permanent reduction in production. Finally, if political and economic power can be spread more evenly through society via inclusive institutions that balance the power of different groups, you can graduate from the bandit hierarchy (though he argues that over a long period of time, even the balance of special interest power we see in many democracies can become sclerotic gridlock that undermines change and growth). This logic forms the basis of a theory of why a state like the USSR could grow so rapidly, and yet then collapse so quickly. A stationary bandit can be a powerful source of growth when its political and economic interests are aligned with the majority of society. But in an autocracy, there's little mechanism for enforcing that alignment over the long term, which leaves you with an unstable platform for building a growing and changing economy.
I'm burying the punchline here though. The reason I started writing about Why Nations Fail was because I saw the book as a sort of perfect comeback to some of the unspoken implications one might take away from The Great Transformation. Now, admittedly, these books don't confront one another head on because they are trying to explain different things. Acemoglu and Robinson want to explain why some countries are rich and others poor. Polanyi (I think) wants to explain why Europe blew itself up in 1940. In some ways this latter fact appears inconvenient for Acemoglu and Robinson insofar as it proves that bad things can still happen to rich nations with mostly inclusive institutions.
But the more you think about it, the more you realize that this exact example highlights the short-sightedness of Polanyi's theory. He wanted to argue that industrialization and the market economy destroy the fabric of society by reducing individuals to a commodity called labor, and productive property rights to a commodity called land. Society's attempts to protect itself from the "self-colonization" of the market serve as his explanation of what led to fascism. And yet, this same terrible market, over exactly the 150 years he discusses, brought an extraordinary increase in standards of living, and an extraordinary broadening of the political franchise. In addition, consider the fact that after the undoubtedly tragic collapse that occurred in the form of WW2, these same nations basically rebuilt their former prosperity within a generation. A lot of poor Africans and Latinos have been waiting literally hundreds of years for this sort of collapse. (Which nicely illustrates the qualitative difference between colonialism and "self-colonialism" -- never trust analogies between closed and open systems.)
Neither of these observations is meant to contradict Polanyi's assertion that the shift to a market economy is a major disruptive force in society. I'm not trying to minimize the suffering involved, blow the trumpet of market or democratic triumphalism, and say that the ends justify the means, especially when we may all be dead at the end. But, "the industrial revolution is disruptive" is neither an interesting thesis nor a good recommended course of action, it's just a forehead-thumpingly-obvious observation. And when I hear that "society protects itself" I can't help but think that what's ultimately under the hood is just a bunch of traditional special interests and elites trying to retain their power. I know Polanyi also tries to throw labor into this mix of interests, but it doesn't actually sit well with the other groups he talks about. Was the building of the modern welfare state really a result of labor "protecting itself" from industrial commoditization? Protecting itself from what exactly, when in many areas we're talking about a transition from serfdom, and even in the case of England the starting point is subsistence agriculture? Disruption doesn't always go smoothly, but that shouldn't make us nostalgic for feudalism! In fact, disruption, of which the market economy is an important part, is exactly how Joe the plumber got a seat at the king's table. We should really be prepared to celebrate it, when it disperses rather than concentrates power. Unfortunately, not something that's easy to predict in advance.
