The Makings of Prosperity
Despite the grandstanding of politicians, and the predictions of economists, it is possible to identify at least some of the fundamentals required to build a prosperous nation through simple analysis.
There are multiple ideologies that can fit within a model for prosperity. There are also several that cannot, but the point is that this is not some restrictive single pathway. The road to prosperity is wider than might be believed and can accommodate a great many human failures. It has wide verges to pull over and assess vehicle troubles, and it is well-signposted for those who can read the signs along the way.
But it is nevertheless a road, and going cross-country will not serve a nation.
Context
The pre-eminent writers in this space are James A. Robinson & Daron Acemoglu.
In addition to doing the most thoroughly based analysis on this area, they have coined the most effective terminology for exploring these topics, and so their terminology is used here.
Preconditions for Prosperity
There are a few things without which prosperity is simply… impossible.
These things are not sufficient to create lasting prosperity - many nations have had these things and gone nowhere - but these things are required to even begin down the road to a prosperous future.
Centralised State Authority: Effective state institutions are crucial to enforce laws and regulations fairly, without rogue elements enforcing their own versions outside of the national authorities. A centralised authority is also important to coordinate large-scale economic activities and provide essential services, such as education and infrastructure, which underpin economic growth and development.
Broad Distribution of Power: Accountability is essential, which requires that political power is not concentrated in the hands of a few. A broad distribution of power among different interests prevents any single group from dominating others and the longer it persists for, the more it helps in creating a system that progressively raises the barrier to prevent absolute rule by one group or person. It is also essential for establishing the Rule of Law.
Rule of Law: The establishment of the rule of law ensures that laws are applied consistently, including to those in positions of power. This helps to prevent the manipulation of the system for personal gain and is the first and most basic of the checks and balances for a successful nation.
While effective rule of law flows from a broad distribution of power, you can have effecient centralised legal power first, and so these three things are the fundamental components of a successful nation.
These preconditions are also “self-defending”:
These three elements support each other. A centralised state preserves the power structure of its constituents. A balance of power will defend the consistent application of laws for its own self interest. The consistent application of laws are the tool that preserves the continuity of the centralised state.
Any centralised state with a balanced distribution of power and a moderately established legal system will tend to remain so unless disrupted by an outside force - and can usually tolerate a large amount of disruption without losing these. Even military conquest has a tendency to simply replace one of the factions in the balance of power. Once established, these preconditions are quite stable.
National Institutions
This site will refer to “institutions” in many places, so here is a brief introduction to just what they are. At their most fundamental the insitutions of a nation are:
Any system, law, or cultural practice, which affects the distribution of wealth and political influence within a society.
These can be broadly categorised into two groups: Political and Economic.
Political Institutions
Political institutions specifically relate to who is able to get their greivances heard and addressed by the governing authority. Whether that’s as minor as having a public mailbox that the president might read, or as substantial as an enshrined right for any person to nominate themselves as a candidate in a free and fair election. It includes freedom of assembly and any checks on the power of the state to simply arrest or dispose of people engaged in protest activity. It also includes systems which prevent people from being heard.
Ultimately, any system or mechanism which impacts how people can participate in their own political system is a political institution.
Economic Institutions
Economic institutions are the formal and informal rules that organize the production, distribution, and consumption of goods and services in a society. These institutions include various systems, policies, and regulations that determine how a country's economy operates. These relate to who is able to invest time and money in the aid of improving thier position in life, and how they can do so.
Ultimately, any system or mechanism which relates to the distribution of wealth in society is an economic institution.
Pillars for Prosperity
The institutions without which no modern society may prosper…
Note that even though Rule of Law comes up again, there is a shift here from mere features of the state mentioned in the preconditions, to the explicit inclusion of every person being covered. This is because in the modern information era, injustice can act as a spark to dry grass - igniting the flame of societal unrest in the blink of an eye.
It is also important to understand that these are not institutions you create once and are done with. Unlike the preconditions they are not self-defending. They must be defended consistently by those who both benefit from them and are outside the government.
…and if just one of them is seriously undermined, they’ll bring the whole roof down.
Every Person is Equal under the Law. [Rule of Law]
Without the rule of law there is no check on those with power to prevent the spread of corruption and exploitative business practices. This creates a volatile economic environment which leads to financial insecurity - as individuals and businesses cannot trust that their health and wealth will be protected by the courts against unlawful actions. Similarly, contracts become unenforceable because there is no assurance that legal remedies will be available if one party fails to honor their agreements, which makes operating in good faith impossible. This uncertainty discourages investment to materially improve an individual’s circumstances (since it can be taken away at any moment) which stifles economic development and growth.
Every Person may Invest in their own Prosperity. [Secure Property Rights]
Secure property rights play a critical psychological role by providing individuals with a sense of stability and control over their resources, which boosts confidence in personal and economic investments. When people are assured that their property—whether physical or intellectual—is legally protected, they are more likely to invest in and improve that property. This individual motivation to improve their own economic position is fundamental to generating the innovation and productivity improvements that drive prosperity.
The universal application of property rights also ensures that all individuals have the opportunity to contribute to economic activity, maximizing the potential for prosperity gain and reducing the likelihood of conflict and instability which arise when those with no legal pathway to success pursue other options.
Every Person may Represent their own Interests. [Political Pluralism]
The principle that every person may represent their own interests, a core tenet of political pluralism, is crucial for fostering a prosperous society. This concept ensures that diverse perspectives and needs are considered in the political process, preventing any single group from monopolising power and making decisions that benefit only a few. Political pluralism encourages the formation of various interest groups and political parties, which can advocate for different segments of society, thereby promoting broader participation in governance. Without this, political power becomes concentrated into the hands of a few, leading to policies that favor these select groups at the expense of the broader population. This concentration of power allows this group to undermine the previous two pillars. This stifles innovation, discourages investment, and perpetuates inefficiencies. Eventually it breeds resentment and instability as marginalised groups pursue extrajudicial solutions to their disenfranchisement. Overall, a diverse political class which represents as many interests as possible, is critical to support the dynamic and responsive political process that are vital for maintaining a stable society and facilitating wealth creation and general prosperity.
But beyond the fundamental pillars…
Inclusive vs Exclusive Institutions
Societies are as diverse as the people who live in them. So, beyond the fundamental pillars, there are more specific institutions than any one person could ever hope to document. Institutions are so broad and so varied and so constantly in flux, that any effort to document them would be outdated before it could be finished.
However, they can be broadly categorised into two groups: Inclusive and Extractive.
The definitions for these are ultimately quite simple:
Inclusive Institutions:
Any institution which extends or expands the opportunity for participation in political and economic life to those not already participating, particularly those who may have been previously excluded, marginalised, or who have been disadvantaged by the loss of previous opportunity due to misfortune or hostile action.
Extractive Institutions:
Any institution which concentrates political and economic power among the select group of political leaders, wealthy individuals, and influential corporations, restricting access to opportunities and participation in decision-making.
How do these contribute to prosperity?
Under some circumstances, prosperity can be created under the influence and direction of extractive institutions BUT history has shown that sustained prosperity can only be achieved in a society with predominantly inclusive institutions. Sometimes prosperity can be grown faster with extractive institutions (this has been demonstrated a few times), but unless a nation transitions to more inclusive institutions once that growth slows down, ultimately that prosperity is undermined.
Ultimately, the greater the extent of inclusive institutions, the quicker prosperity will grow and the more enduring that prosperity will be.
The Vicious and Virtuous Cycles
Now you may ask, “If inclusive institutions must be continuously defended, surely it is inevitable that eventually they must fail?”
Fortunately, there is good news.
Just as systems of exploitation are well-documented for reinforcing themselves in a vicious cycle, there also exists a virtuous cycle.
In the vicious cycle:
Power is concentrated in the hands of a few, typically elite leaders or dominant parties.
Extractive Political Institutions emerge from and reinforce the concentration of power, lacking accountability and excluding broad participation.
The concentration of political power leads to corruption and rent-seeking behaviors, where elites manipulate policies and resources for their personal gain.
Corruption and extractive policies lead to weak protection of property rights, discouraging investment and fair business practices.
With property rights insecure and corruption rampant, economic policies favor the elite and others are discouraged from investing either financial or intellectual capital.
The lack of innovation and economic inefficiency leads to poor economic growth, perpetuating poverty and inequality.
Economic stagnation results in insufficient public investment in essential services like education, healthcare, and infrastructure, which further impedes economic development.
As economic conditions worsen and public services degrade, social discontent grows, potentially leading to unrest but often reinforcing the existing power structure as the elite tighten control to maintain order.
This cycle creates a self-reinforcing loop that can be challenging to break, leading to persistent underdevelopment and inequality.
In the virtuous cycle:
Political power is distributed widely among various interest groups, preventing any single entity from dominating the system.
Inclusive Political Institutions institutions ensure broad-based participation in political processes, preserving the diverse interest groups and fostering democratic governance and accountability.
Strong, enforceable laws protect individual and property rights, ensuring that all participants in the economy can trust in the security of their investments and contributions.
The security provided by the rule of law encourages widespread participation in the economy, allowing individuals and businesses to invest without fear of expropriation or unfair competition.
With a secure, inclusive environment, there is more incentive for technological innovation, which drives economic growth and improves productivity.
Economic growth leads to wealth creation, which can be redistributed through effective public services like education and healthcare, benefiting society as a whole.
Increased wealth funds better public services and infrastructure, which further supports economic development by enhancing human capital and quality of life.
As the general population sees the benefits of growth and inclusivity, social cohesion and political stability improve, reinforcing the cycle of positive development and creating a society that is invested in preserving those benefits.
This virtuous cycle creates a positive feedback loop, where improvements in governance lead to economic enhancements that further strengthen political and social structures, promoting sustained development and prosperity.
Not Mutually Exclusive
It’s important to note that these are not mutually exclusive cycles. All societies contain at least some elements of both inclusive and extractive institutions. Which means both cycles are always at play simultaneously.
However, one will always be dominant - and as they are both self-reinforcing to various degrees a dominant cycle should remain so unless it interacts poorly with a critical juncture. Still, it is important to remember that you are the self-reinforcing mechanism for the virtuous cycle. You vote, donate, discuss, and participate in the mechanisms that preserve your own prosperity.
You can find resources for further reading at the bottom of the page here: