Why do some countries’ economies provide increasing standards of living for the common man while others leave the vast majority of people in grinding poverty? That is probably the most important economic question there is. In fact, one of the founding fathers of economics, Adam Smith, wrote a book—appropriately titled The Wealth of Nations—just to answer that question. Massachusetts Institute of Technology economist Daron Acemoglu and Harvard economist and political scientist James A. Robinson address the question in their new book, Why Nations Fail. Does Acemoglu and Robinson’s book succeed? On its major thesis, yes. Along the way, though, they make some major mistakes in economic history, especially about 19th century U.S. economic history, and display a lack of knowledge about 20th century economic thought.

Extractive and inclusive countries | Acemoglu and Robinson divide countries into two types: extractive and inclusive. In extractive countries, one group of people—usually a very small minority—uses coercive power to grab wealth from and, often literally, enslave a larger group. In inclusive countries, political power is widely shared and therefore it is hard for one small group to be in control. The majority of the people in extractive countries have very little incentive to produce wealth because they know that the powerful group will take it from them. Summarizing their case, the authors write, “Nations fail today because extractive economic institutions do not create the incentives needed for people to save, invest, and innovate.” In inclusive countries, by contrast, no one small group is in control, and so the economic institutions tend to work for most groups. And what are these institutions? The ones that a fan of Adam Smith might expect: respect for private property, the relative absence of government-granted privilege, and the rule of law.

You might wonder, given that their message is similar to Smith’s, why Acemoglu and Robinson’s book has made such a big splash. The main reason is that they give so much evidence—evidence that Smith did not have access to. Also, whereas Smith did not explain why some economies are extractive and some inclusive (Smith never used those terms, but he was clearly discussing the concepts), Acemoglu and Robinson try to. In the process, they teach us a lot about countries from Peru to the United States and Canada, from Uzbekistan to China to Africa.

Consider the tragic case of Peru. “Extractive” institutions there began early, even before the 16th century conquest by the Spanish government, but Spanish colonial official Francisco de Toledo “perfected” it in the 16th century. As the authors put it, “Spanish conquistadors found a centralized, extractive state in Peru they could take over and a large population they could [forcibly] put to work in mines and plantations.” Building on an Incan tradition of forced labor, de Toledo “defined a huge catchment area, running from the middle of modern-day Peru and encompassing most of modern Bolivia.” In this area, he required one-seventh of all males to work in the mines. That lasted for 250 years, until it was finally abolished in 1825. So Peruvians went for well over two centuries without a free market in labor. That put them far behind their counterparts in what were to become the United States and Canada.

Why did the United States and Canada turn out to be so much richer? After all, they had fewer natural resources than South America and a much harsher climate, so one might have expected they would do much worse. Although Acemoglu and Robinson don’t cite Smith on this, he provided the answer in 1776 in The Wealth of Nations. He argued that it was the difference in economic freedom. The economic institutions that the Spanish government established in Latin America were less conducive to economic growth than the more free-market institutions in the non-Mexican part of North America. Acemoglu and Robinson make the same argument, although with much more detail and historical backing.

But they go further and try to answer an additional question: Why were the United States and Canada freer? Their answer, ironically, is that the two countries were the dregs—they were all that remained in the New World after the Spanish and Portuguese had staked their claims in Latin America. And because there was so little to work with, the colonists in North America, to keep from starving, had to be allowed to have private property, little or no taxation, and relatively free labor markets.

Maintaining extractive policies | The authors apply their extractive/​inclusive dichotomy to countries around the world and get a lot of mileage from the paradigm. We have examples of highly extractive governments even in the modern world. One shocking one, to me at least, is the case of Uzbekistan. The Soviet government had imposed a highly extractive regime—communism—on Uzbekistan, with government ownership of all farmland. But when communism ended, the new government’s first president, Ismail Karimov, simply refashioned the extractive system. He forced farmers to grow cotton and sell it to him at artificially low prices, which he then exported at world prices. Because of the low prices they received, cotton farmers were unwilling to invest in new harvesting machinery, reducing the harvest. So what did Karimov do? He turned children into slaves, taking them out of school for the two months of harvest season and assigning them to farms. How much were they paid? In 2006, when the world price of cotton was about $1.40 per kilogram, the children—who harvested 20 to 60 kilos per day (worth, therefore, between $28 and $84)—were paid three cents per day.

One of the authors’ best expositions is about the second-largest economy in the world, China. They trace the horrible results of Chairman Mao’s homicidal policies in the 1950s and 1960s and unearth a quote in which he expressed his admiration for Adolf Hitler. They also lay out how the relaxation of government controls on agriculture in the early 1980s “led to a dramatic increase in agricultural productivity.” Surprisingly, they do not cite Kate Zhou’s How the Farmers Changed China, which tells the story in more detail. They argue persuasively, though, that Chinese growth “will run out of steam unless extractive political institutions make way for inclusive institutions.”

What about Africa, the basket case of the world’s continents? The authors tell detailed stories about the many failed nations in Africa and find colonization by European countries to be one of the main culprits. One of the few African countries that, in their opinion, succeeds is Botswana, and they tell a fascinating story about how an 1895 visit to London by three African chiefs persuaded the British government to keep its hands off the territory. Such stories provide an antidote to two viewpoints that many other economists share. The first, formulated most clearly by Jeffrey Sachs, is that economies in tropical climates are destined for failure because of tropical diseases and the lack of arable land. Botswana is a strong counterexample. The second viewpoint is that much of colonialism was good for the countries made into colonies. One of the most tragic stories they tell is of the Congo, which King Leopold II of Belgium badly exploited. They also give chapter and verse on the damage done by colonization in Latin America.

Centralization confusion | One claim the authors make, though, that is not entirely consistent with their own evidence is that countries without central governments do worse than countries with central governments. They cite Afghanistan, Haiti, and Nepal as examples of countries that “failed to impose order over their territories” and, thus, failed to achieve economic progress. But elsewhere in the book, they point out the well-known fact that one of the chief sources of economic progress in Europe after the decline of the Roman Empire was that many European cities “were outside the sphere of influence of monarchs and aristocrats.” And, as previously noted, Spanish conquerors found their extractive job made easier by the prior existence of a strong central state.

The authors’ confusion about this issue plays out in their discussion of Somalia. Somalia, they write, “is divided into deeply antagonistic clans that cannot dominate each other.” This, they claim, “leads not to inclusive institutions but to chaos.” While it’s true that Somalia is poor, its economic progress after losing its central government has been faster than that of most other African countries over that same time period. In “Somalia After State Collapse: Chaos or Improvement?” a 2008 article in the Journal of Economic Behavior and Organization, economists Benjamin Powell, Ryan Ford, and Alex Nowrasteh document that progress.

United States | The authors’ misstatements are greatest about the country I know most about: the United States, especially the United States after the Civil War. They get two central facts wrong. First, they claim that the so-called trusts run by people like Cornelius Vanderbilt and John D. Rockefeller were instances of competition giving “way to monopoly.” Interestingly, their bibliographic essay cites no sources for this claim. That’s not surprising. The reason is that Vanderbilt was a monopoly buster who won a major Supreme Court case against the New York state legislature’s attempt to monopolize steamship travel. And during the period that Rockefeller was gaining market share, he did so by cutting prices, not raising them. In his 1987 book A Theory of Efficient Cooperation and Competition, University of Chicago economist Lester Telser points out that between 1880 and 1890, the output of petroleum products rose 393 percent and the price fell 61 percent. Writes Telser: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.”

On the post–Civil War southern United States, the authors’ discussion is oblivious to mainstream economic scholarship on the topic. For instance, they make the astonishing claim that in the century between the Civil War and the civil rights movement, “southern incomes fell further relative to the U.S. average.” In fact, scholars generally cite this era as one of the premier examples of economic convergence.

Possibly related to their mis-telling of the story of U.S. trusts, all the examples they give of extractive institutions are of small, wealthy minorities extracting wealth from large, poor majorities. They omit another possibility that seems to be happening in modern-day America under President Obama: A government of elitists who, claiming to represent a large, less-wealthy majority, extract wealth from a small, wealthy minority. This omission is somewhat surprising. In their discussion of Africa, the authors point out that for the Kongolese to be productive would not have been worthwhile “since any extra output that they produced using better technology would have been subject to expropriation by the king and his elite.” We are not, in America, at the point where any extra output will be taken by the government, but we are much closer to that point than we were just a few years ago. In high-tax California, for example, where many productive people are rumored to live, those making $1 million a year or more have 13.3 percent of their extra output taken by the state government, up from “only” 10.3 percent last year. Some 43.4 percent of their extra output is now taken by the federal government, up from “only” 37.9 percent last year. Marginal tax rates above 50 percent would certainly seem to damage incentives. Yet the authors never address this issue. That’s disappointing.

Acknowledging predecessors | Finally, the authors claim that “most economists” believe that countries are poor because their rulers don’t know how to make them rich. Acemoglu and Robinson’s better explanation is that the rulers are out to feather their own nests by extracting wealth from their citizens. But they write as if they think they are the first economists to come up with this explanation. In fact, development expert Stanislav Andreski used the term “kleptocrat” to describe precisely the kind of ruler Acemoglu and Robinson describe. And a whole school of thought in economics starts with the assumption that political leaders are out for their own self-interest and concludes that those leaders, if not constrained, will do very bad things. That school of thought is Public Choice. One of its members, the late James Buchanan, even won a Nobel Prize for his contributions. It’s shocking that these obviously well-educated authors don’t even mention that school.