What Bill Gates Got Wrong About Why Nations Fail

Our recent book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, received the harshest reviews from those who see geography and culture as the root causes of poverty, and enlightened leaders -- or even more enlightened outside donors and organizations -- as the keys to economic development. Perhaps unsurprisingly, given his dedication to international aid, billionaire foundation chief Bill Gates falls into this category: His Feb. 26 review of our book was particularly uncharitable. Unfortunately, however, it was also dead wrong on many counts. COMMENTS (0) SHARE: Share on twitter Twitter Share on reddit Reddit inShare15 Bookmark and Share More... Gates's review is disappointing, but not just because he disagrees with us. As academics, we expect that. Research is all about arguing and contradicting, finding new pieces of evidence, developing new concepts and perspectives, and getting closer to the truth. Alas, Gates fails in this endeavor. His inability to understand even the most rudimentary parts of our thesis means that his review fails to invite constructive argument. Nonetheless, we feel compelled to respond because of the undue attention the review has generated. To start with, Gates makes some pretty baffling statements about our book, such as his assertion that "important terms aren't really defined." Actually, all of the major concepts we use in the book are defined; one just needs to read the book. Other assertions demonstrate not only that Gates is unfamiliar with the academic literature, which is understandable, but that he actually did not bother to consult the bibliographic essay and the references at the end. He writes, "The authors ... attribute the decline of Venice to a reduction in the inclusiveness of its institutions. The fact is, Venice declined because competition came along ... Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for their loss of the spice trade." This is just bad history. Venice didn't decline because of the loss of the spice trade. If that were the case, the decline should have started at the very end of the 15th century. But the decline was already well underway by the middle of the 14th century. More generally, research by Diego Puga and Daniel Trefler shows that Venice's fortunes had nothing to do with competition or the spice trade. Likewise, Gates seems to think that the Maya declined because of the "weather." Though there is certainly scholarly dispute over why Maya civilization decayed, to our knowledge no reputable scholar argues that it was due to the weather. Instead, most scholars emphasize the role of inter-city warfare and the collapse of Mayan political institutions. Nor does the book, as Gates would have it, "overlook the incredible period of growth and innovation in China between 800 and 1400." We discuss that period, and explain why it didn't translate into sustained economic growth (see Chapter 8, in particular, pp. 231-234). Gates also says at one point that our book "refers to me in a positive light." Sorry, we do no such thing. We point out that Gates, just like Mexican telecom mogul Carlos Slim, would have loved to form a monopoly. He tried and failed. What our book shows in a positive light are the U.S. institutions, such the Department of Justice, that stopped Gates and Microsoft from cornering the market. We say, "sadly there are few heroes in this book." Bill Gates was not one of them. On a related note, Gates writes that that our book is "quite unfair to Slim." Mexico, he contends, is "much better off with Slim's contribution in running businesses well than it would be without him." But once again, this reveals a lack of understanding of our main thesis, which isn't that Carlos Slim is evil and the root cause of Mexico's problems. We argue that ambitious entrepreneurs like Gates or Slim will do good for society if inclusive institutions constrain them, and that they will mostly serve their own interests otherwise. So the right counterfactual to Slim isn't no Slim, but a Mexico in which people like Slim (and hundreds of other talented would-be entrepreneurs who never got the opportunity to flourish because of the country's poor education system or because of its terrible competition laws) operate within the context of inclusive economic institutions and therefore enrich their society to a much greater extent. For the record, however, before cheerleading Slim, Gates might want to read the OECD's 2012 report on telecommunications policy and regulation in Mexico, which estimates the social costs of Slim's monopoly at U.S. $129 billion and counting. (The latest Forbes list of the world's richest people puts Slim's net worth at U.S. $79 billion). So in what way is Mexico better off exactly? Gates also complains in his review that we "ridicule modernization theory." We don't. We try to articulate an alternative theory of extractive growth -- which takes place under extractive, authoritarian political institutions -- where countries grow because their leadership controlling these extractive institutions feels secure and able to control and benefit from the growth process. This occupies a large part of our book because it is a central feature of economic and political development over the last several thousand years. Our theory suggests why extractive growth doesn't automatically lead to more inclusive institutions: Growth is made possible, at least in most cases, by the leaders and dominant elites' belief in their relative security. Gates is right that there are examples like South Korea (which we discussed in the book) that have transitioned to more inclusive institutions following a period of extractive growth. But South Korea's transition to democracy in the 1980s was in no way automatic. It came about as a result of protests by students and workers against the military regime, and only after the repression by the military failed to quell the unrest. More importantly, as a cursory look at our bibliographic essay would have shown, our dismissal of modernization theory isn't based on a few case studies or a gut feeling, but on careful econometric evidence. See, for example, our papers titled "Income and Democracy" and "Re-evaluating the Modernization Hypothesis, both jointly authored with Simon Johnson and Pierre Yared. At another point in his review, Gates contends that economic growth is "strongly correlated with embracing capitalistic economics." Yet it is far from clear what he means by "capitalistic economics." Were Egypt's economic institutions during the presidency of Hosni Mubarak -- after he liberalized the economy and reduced the role of the state -- capitalistic? Most people refer to this as "crony capitalism," but perhaps this is all part of capitalist economics? Or consider the long dictatorship of Porfirio Diaz in Mexico in the 19th century, which eradicated many of the remaining restrictions of the Spanish colonial system, established an economy based on private enterprise (especially of his cronies), and "freed" markets (including the creation of the market for coerced labor). Was that capitalistic? What about South Africa under apartheid, based on private enterprise by whites, but disempowering and exploiting the majority blacks? Perhaps Gates himself should have more carefully defined his terms. The concept of capitalism doesn't feature in our book for good reason. It muddies the waters. Our point, by which we stand strongly, is that what distinguishes societies isn't whether they are centrally planned or capitalist, but whether they are extractive or inclusive. Though centrally planned economies are by their nature extractive, so are many "capitalist" economies. Finally, Gates takes issue with our supposedly "huge attack on foreign aid," citing in particular our "misleading" claims about Afghanistan. But again, he would have benefited from looking at the bibliography. The finding that about 10 percent of foreign aid goes to intended recipients isn't from Afghanistan, as he seems to think, but from Uganda, which was not a war zone but a peaceful country at the time of the 2004 study we cite. More importantly, there is now considerable evidence showing that foreign aid in the postwar era has had little positive impact on economic development, which Gates chooses to ignore (see, for example, William Easterly's White Man's Burden). Denying this is really putting your head in the sand. But even sadder is the fact that we don't even argue against foreign aid. What we argue in the book is that aid -- the little of it that reaches its target -- does a lot of good for poor people. But it is not the solution to the real problems of development. Instead of endlessly asserting empirically untenable positions, we all need to move on and find more constructive ways to engage with poor countries. Foreign aid should certainly be part -- but not all -- of this engagement. Gates does correctly point out that much is missing from the framework in our book. Even if underdevelopment isn't just a problem of bad leadership, and even if its solution won't come from enlightened leaders, a more complete framework should indeed integrate the behavior of leaders that play an important role in state building, organizing collective action, and articulating visions for social change. Examples of such leaders include Tunisia's Habib Bourguiba and Singapore's Lee Kuan Yew, both of whom undoubtedly influenced the course of their country's development. But we chose to emphasize institutions in our book because for leadership to have a lasting impact, it must become institutionalized via inclusive political institutions. After several decades of promoting education and developing a Tunisian national identity, for example, Bourguiba, who ran Tunisia as a dictator, was elbowed out of power by a very different sort of strongman, Zine El Abidine Ben Ali, who was far more interested in using his power to loot the country's resources. But Gates doesn't seem to be interested in such subtleties, preferring instead to criticize every aspect of Why Nations Fail. Some say that all publicity is good publicity, and we should be thrilled to have Bill Gates review our book. Publicity is nice. But we spent more than 15 years researching, writing, and thinking about these topics, and we would be thrilled if the reviewers actually read and understood the book in the first place. Then we could have a constructive debate about the root causes of poverty in the world.

'Spousonomics': All's Fair in Love and Economics

In Spousonomics: Using Economics to Master Love, Marriage, and Dirty Dishes, Paula Szuchman and Jenny Anderson offer an amusing attempt to solve some of love's stickiest issues by applying the precision of economics to the messiness of relationships.
"At its core, economics is ... the study of how people, companies, and societies allocate scarce resources," Szuchman and Anderson say, "which happens to be the same puzzle you and your spouse are perpetually trying to solve: how to spend your limited time, energy, money, and libido in ways that keep you smiling and your marriage thriving.... The trick is to a) boost those precious resources and b) allocate them more intelligently. Do that, and before you know it, you'll be on your way to a better return on your marriage."
The authors don't just make things up. Szuchman, a page one editor at The Wall Street Journal, and Anderson, a New York Times reporter who spent years covering Wall Street, logged countless hours interviewing economists, psychologists and hundreds of couples coast-to-coast. They thank United Sample for helping them survey roughly 1,000 people nationwide to come up with what they refer to as their "Exhausting, Groundbreaking, and Very Expensive Marriage Survey." And they clearly did their homework -- on everything from Holland's tulip craze to the Cuban missile crisis.
Whether the book's insights could save a faltering marriage is up for debate, but it is a fun read. Economists "turned out to be a surprisingly romantic bunch," the authors write, and they discover that economics offers "dispassionate, logical solutions" to "thorny, illogical, and highly emotional" domestic disputes. "When it was all over, we were convinced: Economics is the surest route to marital bliss."
To prove it, the authors structure each chapter around a different economic theme and then use case studies to show how various economic principles apply to marriage. Some attempts, such as plotting sex along a supply and demand curve, come off as a bit of a stretch. Other juxtapositions spark fresh insights and might even inspire a practical solution or two. Szuchman and Anderson use division of labor, for example, to take a clear-eyed look at how couples should most effectively divide household chores. They remind us that being loss averse may lead to irrational or unproductive decisions and that trade-offs are part of life -- get used to it.
In both language and concept, the book ricochets from economic jargon to down-and-dirty dishing about sex, sometimes struggling to connect the two. Case in point: Do Szuchman and Anderson really believe that sex is "merely a function of supply and demand" and that couples can boost the amount of sex they have by bringing its cost down?
"By the 'cost' of sex, we don't mean the literal cost of paying for sex," they say. "We mean what it costs you, as in what you have to give up to get it -- the fifteen minutes of sleep you'll miss out on, the emails you won't have time to reply to, the last-minute run to the supermarket to make sure little Johnny's lunch is stocked with organic applesauce." From an economic standpoint, when the cost of sex goes up, the demand for it goes down, they argue. The solution: "Lower the costs. Do that, and the quantity demanded will rise almost instantly."
Likewise, there is a chapter comparing economic bubbles to new love's giddy infatuation. In economics, bubbles occur when the price of something rises far above its actual worth. This is exactly what couples do early in their relationship, Spousonomics argues: They over-value each other. They become blind to each other's faults. They don't heed warning signs that, in hindsight, should have been obvious.
Marriage as a Business
Still, even when the analogies are a reach, the unexpected comparisons provide surprising food for thought. In the chapter on bubbles, for example, Szuchman and Anderson offer one economist's views about how to approach recovery after the bubble bursts. Austrian economist Joseph Schumpeter argued that bubbles are necessary for the economy, opening it up to a cycle of "creative destruction" that allows the economy to revitalize itself and become more vibrant and productive. So bubbles are actually a good thing. The same principle could be applied to marriage, the authors argue. Disillusionment is painful, but sometimes a process of death and rebirth is required for a relationship to grow. "In other words, you can't spackle the holes in the wall and cover them with pictures," they write. "Sometimes you need to tear the wall down entirely and rebuild it from scratch."
Occasionally, Spousonomics offers economic insights that not only make sense but might actually help a marriage work better. The chapter on division of labor, for example, points out that couples who divide household chores using the theory of comparative advantage might be better off than those who split duties straight down the middle.
Comparative advantage is the cornerstone of free trade. It says that countries should specialize in whatever good they produce most efficiently and trade for the rest. Marriage can also benefit from such division. "Think of marriage as a business comprising two partners," the authors write. "You're not only business partners in the sense that you work together for the good of your company, you're also trading partners who exchange services, often in the form of household chores. How should you decide who does what?"
For centuries, marriage divided its labor and thrived from specialization, the authors assert. Husbands and wives had very specific roles and a very clear division of duties. But as the economy changed, technology advanced, and women entered the workforce, the balance changed. According to Wharton business and public policy professors Betsey Stevenson and Justin Wolfers, marriage began to shift from "a forum for shared production to shared consumption."
Of course, that shift has made it difficult to decide who should do the dishes. In one case study, a couple named Eric and Nancy decided it would be fair to divvy up all the housework 50/50. They rotated everything: walking the dog, paying the bills, doing the laundry, cleaning the bathroom. They both did it all -- and resented each other as a result. Finally, after the bickering and score-keeping became unbearable, they decided to divvy up the chores based on comparative advantage -- and both saved time as a result.
"Like two countries, married people also exchange goods and services, and each also brings to the table a different set of abilities and interests. By figuring out which of them has the comparative advantage in a range of tasks, from dishes to dog walking to bulb planting, Eric and Nancy could then decide who would specialize in what," Szuchman and Anderson write. "Life need not be a fifty/fifty split for each person to be happy. It could be sixty/forty, or seventy/thirty, or even ninety-nine/one, depending on the people, the situation, and the willingness to put away the calculator and give and take based on what really works best rather than what we think should work best."
Loss aversion is another economic concept the authors tie successfully to marriage. Economists have found that people act irrationally in the face of loss -- even the possibility of loss. In fact, people hate losing more than they love winning, the authors write: According to economists, losing hurts twice as much as winning excites. Look no further than the stock market for proof: The financial press is filled with tales of hapless traders who make risky bets to recoup small losses.
"Here's the punch line," Szuchman and Anderson write: "Loss aversion is messing with your marriage. When loss aversion kicks in, you're liable to stay up all night arguing because you don't want to lose a fight. You'll refuse to compromise because it means giving up what you want. You won't apologize because you don't want to lose face. And you'll fail to appreciate the good stuff that's right in front of your because all you can think about is how much more fun married life used to be."
Making Trade-Offs
Sometimes people may feel that they are losing something based simply upon how a choice is presented. In an experiment, psychologists Daniel Kahneman and Amos Tversky found that people would make different choices depending upon how a question was asked.
The researchers created a scenario about a disease outbreak that was expected to kill 600 people, and asked test subjects to choose between two plans: Plan A had a 100% chance of saving 200 people; Plan B had a one-third chance of saving 600 lives but a 2/3 chance of saving no one. Seventy-two percent chose Plan A.
Then the researchers offered two new plans: Plan A had a 100% chance that 400 people would die; Plan B had a 1/3 chance of no one dying and 2/3 chance that everyone would die. The plans are exactly the same, but in the second round, 78% of test subjects chose plan B.
"The first presents the options in terms of who lives and the second in terms of who dies -- in other words, as potential gains or potential losses. Invariably, subjects gravitated toward the gains," the authors write. For marriage, the conclusion is clear. "Frame a choice differently and you might change your mind about which path to take. You might also feel more open to compromise. That's because our willingness to compromise has a lot to do with whether we think we're losing or whether we see the potential for a gain."
Reframing one's perspective on marriage is hard, especially when both parties have invested heavily in their own positions. But again, there is an economic fix. "Economists would argue that fixating on past investments -- or what's known as 'sunk costs' -- when weighing what to do in the future is a waste of time," Szuchman and Anderson point out. "Sunk costs are just what they sound like: sunk, buried, kaput, finito. Let them go, a wise economist would say, focus on future costs and benefits, not money you've spent and can't get back."
Ultimately, both marriage and economics are filled with trade-offs. The classic example is the choice between guns and butter. The more a country spends on national security, in other words, the less it has to spend on goods. Marriage is also a game of trade-offs, and sometimes they aren't fair.
In one case study, Gus seethes about having to take on all of the housework and parenting duties while his wife Abby goes through medical school. The nine-year haul seemed unfair to Gus, but he stuck it out because he knew that long-term it would pay off. In other words, he managed to think like an economist.
"Economists say that in a market economy, people inevitably face trade-offs between equity -- or what's fair -- and efficiency, or the optimal allocation of resources," the authors write. "The problem with fixating on life's unfairness is that it precludes our ability to think clearly about trade-offs, which can lead to very inefficient outcomes. The solution: Get over it. Not exactly a high-concept solution, but the only way to tackle inequity aversion is to will it away -- to recognize that the more time you spend in an it's-not-fair mentality, the less time you have to calculate the long-term benefits of a trade-off, for tallying up the short-term costs, and, ultimately, for finding solutions."

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