Why Nations Fail

Hogan and Chamorro-Premuzic argue that all large scale social phenomena—wars, economic disasters, etc.—can be explained in terms of personality. For individual lives, character is fate, and the fate of nations (and other organizations) depends on the character of the leaders. Put more simply, who is in charge really matters. When competent people direct organizations, the organizations tend to prosper, and so do the individual incumbents. When incompetent people are in charge, bad things happen to organizations and to the incumbents. 

This is a gloomy generalization because so many leaders are incompetent—we estimate that the base rate of managerial incompetence in corporate American is at least 50%. For politicians, the figure seems much higher, but we have no systematic data. 

Acermoglu and & Robinson have recently provided extensive historical documentation for the view that the fate of organizations depends on the character of the leaders. With apologies to the authors, I can summarize their argument as follows. First, all people are selfish and opportunistic, and some people are more skilled at gaining status in organizations than others. As a result, the tops of organizational hierarchies contain a large percentage of people who are politically talented but largely motivated by greed and selfishness. Second, power corrupts, and, of course, absolute power corrupts absolutely. Third, in organizations where the rules (and mechanisms of enforcement) against corruption and self-dealing are weak, leaders will loot. Fourth, kleptocratic organizations funnel economic output toward parasitic elites, and this misdirection of financial resources discourages innovation and investment. Fifth, these systems are self-perpetuating; the plunder empowers the corrupt elite, and following generations of leaders have strong incentives to keep the system going. Finally, then, reform from within rarely happens which makes the long term failure of these organizations inevitable. 

Three examples illustrate these points. First, consider the histories of Spain and England in the 17th and 18th centuries. Both started as medieval monarchies (tyrannies), but the English monarchs had slightly less control. When the great European overseas explorations began in the 17th century, the Spanish monarchs controlled trade, whereas in England, trade was controlled by “privateers”. Riches from the Americas solidified Spanish tyranny but created an elite merchant class in England. The English revolution of 1688 secured the rights of the merchant class, counterbalanced the landed aristocracy (the kleptocrats), and set the conditions for further world class economic growth—in contrast with Spain, where the aristocracy remained in control. 

Second, Central and South America contained dense populations ripe for plundering, and the Spanish put governments in place to make it happen—“it” means funneling wealth to the Spanish aristocracy. Unfortunately for the British, the populations of their North American colonies were dispersed, which made them hard to enslave. As a result, colonial governors created market incentives for the early settlers in Virginia and Massachusetts, and the subsequent pluralism created American industry and wealth—in contrast with the lingering poverty of the Spanish Americas.  

Third, in Venice, during the early stages of its economic development, there was a partnership between the rich Venetians who built the merchant fleet and the sailors who manned the fleet; the profits from the voyages were shared, creating upward mobility for the sailors. Starting in the late 1400s, greed got the best of the ruling class, trade was nationalized (and profits were no longer shared), so that, by 1500, the decline of Venice as a great power was well underway. 

I would like to highlight three lessons from the forgoing discussion. The first is the obvious point that power corrupts and leaders will steal when they can. The second lesson is that robust regulatory institutions (the bête noire of conservatives) are needed to keep the power elite in check; corruption will always be with us, at every level of government, but corruption is worse in Nairobi than in Chicago—because there are more controls on the greed of powerful people. But finally, consider the individual psychological dynamic underlying these themes. It is “engagement”. To the degree that the citizens of a country or members of an organization feel that they can in some way participate in and share the fortunes of their collective, they will work toward and support the goals of the enterprise. Engagement is not merely a contemporary HR fad, it is a potent dynamic underlying the fate of nations. Successful organizations depend on competent leadership, which creates subordinate engagement; conversely, bad leadership alienates the subordinates and ruins organizations.