Chapter 4

1. Acemoglu and Robinson believe that institutional divergence occurs through a pattern they
call “institutional drift”, which has similarities with other evolutionary processes. Please
elaborate.
Black Death and the expansion of the Atlantic trade in 1600 were major critical junctures for
European powers and interacted with different initial institutions to create a major divergence.
In the 14th century, in Western Europe peasants had more power than in the Eastern. The Black
Death led to the dissolution of feudalism in the West and the Second Serfdom in the East.
Because Eastern and Western Europe started to diverge, the new economic opportunities of
the 17th, 18th, and 19th centuries would have fundamentally different implications for these
different parts of Europe.
In 1600, the grip of the Crown was weaker in England than in France and Spain, so the Atlantic
trade led to the creation of new institutions with greater pluralism in England, while
strengthening the French and Spanish monarchs. Relatively small institutional differences in
England, France, and Spain led to fundamentally different development paths.

No two societies create the same institutions as they have distinct customs, systems of
property rights, level of political centralization, etc. Societies are constantly subject to
economic and political conflicts and find different ways of dealing with them due to specific
historical differences.

That differences can be initially small, but they start to accumulate, creating a process of
“institutional drift”, meaning that two countries with similar characteristics but small
differences in their institutional structures, will eventually become institutionally further from
each other.

The differences created by institutional drift become especially consequential, because they
influence how society reacts to changes in economic or political circumstances during critical
junctures.
Just as two isolated populations of organisms will drift apart slowly in a process of genetic drift,
because random genetic mutations cumulate, two otherwise similar societies will also slowly
drift apart institutionally. Though, just like genetic drift, institutional drift has no
predetermined path and does not even need to be cumulative. Over centuries it can lead to
perceptible, sometimes important differences.
2. How did different parts of the world react to the challenge posed by the industrial
revolution? Please provide a summary and exemplify.

The diffusion of the industrial revolution had different effects on the world, as any other
critical juncture. It was the different institutions in place that determined the impact. small
differences had been amplified over time by prior critical junctures. These institutional
differences and their implications have tended to persist to the present due to the vicious and
virtuous circles and are the key to understanding both how world inequality emerged and the
nature of the lay of the land around us.

Some parts of the world developed institutions that were very close to those in England, which
developed a market economy based on inclusive institutions and sustained economic growth
in XVIII century, as the USA, Canada and Australia, though by a very different route. In the end
the process of emerging, institutions in these countries lead to a centralized state with
pluralistic political institutions allowing the Industrial Revolution to spread rapidly in such
countries.

Western Europe, experiencing many of the same historical processes, had institutions similar
to England at the time of the Industrial Revolution. There were small but consequential
differences between England and the rest, which is why the Industrial Revolution happened in
England and not France. This revolution then created an entirely new situation and
considerably different sets of challenges to European regimes, which in turn spawned a new
set of conflicts culminating in the French Revolution. The French Revolution was another
critical juncture that led the institutions of Western Europe to converge with those of England,
while Eastern Europe diverged further.

The rest of the world followed different institutional trajectories. European colonization set
the stage for institutional divergence in the Americas, where in contrast to the inclusive
institutions developed in the United States and Canada, extractive ones emerged in Latin
America, which explains the patterns of inequality we see in the Americas.

Africa was the part of the world with the institutions least able to take advantage of the
opportunities made available by the Industrial Revolution, as centralized states developed very
late and tenuously compared to the rest of the world. Where they did form, they were likely as
highly absolutist as the Kongo and often short lived, usually collapsing. Africa shares this
trajectory of lack of state centralization with countries such as Afghanistan, Haiti, and Nepal,
which have also failed to impose order over their territories and create anything resembling
stability to achieve even a modicum of economic progress. The Industrial Revolution has still
not spread to Africa because that continent has experienced a long vicious circle of the
persistence and re-creation of extractive political and economic institutions.

In the nineteen century, absolutism not so different from that in Africa or Eastern Europe was
blocking the path of industrialization in much of Asia. In China, the state was strongly
absolutist, while in India, institutional drift worked differently and led to the development of a
uniquely rigid hereditary caste system that limited the functioning of markets and the
allocation of labor across occupations. As China,

India, and others failed to take advantage of commercial and industrial opportunities, Asia,
except for Japan, lagged behind as Western Europe was forging ahead.

Japan, like China, was under absolutist rule in the 19 th century, but the Japanese political
revolution enabled more inclusive political institutions and much more inclusive economic
institutions to develop, and laid the foundations for subsequent rapid Japanese growth, while
China languished under absolutism.

South Korea, Taiwan, and finally China achieved breakneck rates of economic growth since the
Second World War through a path similar to the one that Japan took. In each of these cases,
growth was preceded by historic changes in the countries’ economic institutions —though not
always in their political institutions, as the Chinese case highlights.

If the political and economic institutions of Latin America over the past five hundred years
were shaped by Spanish colonialism, those of the Middle East were shaped by Ottoman
colonialism.

The Ottoman state was absolutist and its institutions highly extractive with a system of
taxation that made property rights far from secure. In the XX century Europeans took control
of the region. When European control ended, the same dynamics we have seen in sub-Saharan
Africa took hold, with extractive colonial institutions taken over by independent elites.
Chapter 6
1. The commenda opened a process of social mobility in medieval Venice that led to many
institutional changes of an inclusive kind. Why? And what were those changes?
One of the key bases for the economic expansion of Venice was a series of contractual
innovations making economic institutions more inclusive. The most famous was the
commenda, a type of joint stock company, formed only for the duration of a single trading
mission. A commenda involved two partners, a “sedentary” one who stayed in Venice and one
who traveled. The sedentary partner put capital into the venture, while the traveling partner
accompanied the cargo. Typically, the sedentary partner put in the lion’s share of the capital.
Young entrepreneurs who did not have wealth themselves could then get into the trading
business by traveling with the merchandise. It was a key channel of upward social mobility.
Any losses in the voyage were shared according to the amount of capital the partners had put
in. If the voyage made money, profits were based on two types of commenda contracts. If the
commenda was unilateral, then the sedentary merchant provided 100% of the capital and
received 75% of the profits. If it was bilateral, the sedentary merchant provided 67% of the
capital and received 50% of the profits.
After 1032 , the doge was elected with a Ducal Council, to ensure that he did not acquire
absolute power.
In 1082, Venice was granted extensive trade privileges in Constantinople and a Venetian
Quarter was created.
The economic expansion of Venice, which created more pressure for political change,
exploded after the changes in political and economic institutions that followed the murder of
the doge in 1171.
The first important innovation was the creation of a Great Council, which was to be the
ultimate source of political power. The council was made up of officeholders of the state and
was dominated by aristocrats. Each year 100 new members were nominated to the council by
a nominating committee whose 4 members were chosen by lot from the existing council. The
council chose the members for two subcouncils, the Senate and the Council of Forty, which
had legislative and executive tasks. The Great Council chose the Ducal Council, which was
expanded from 2 to 6 members.
The second innovation was the creation of another council, chosen by the Great Council by lot,
to nominate the doge. Though the choice had to be ratified by the General Assembly, since
they nominated only one person, this effectively gave the choice of doge to the council.
The third innovation was that a new doge had to swear an oath of office that circumscribed
ducal power. Over time these constraints were continually expanded so that subsequent doges
had to obey magistrates, then have all their decisions approved by the Ducal Council. The
Ducal Council also took on the role of ensuring that the doge obeyed all decisions of the Great
Council.
These political reforms led to a series of institutional innovations: in law, the creation of
independent magistrates, courts, a court of appeals, and new private contract and bankruptcy
laws. These new economic institutions allowed the creation of new legal business forms and
new types of contracts. There was rapid financial innovatio.
However, the gold book in medieval Venice represented a barrier to the evolution of the
inclusiveness political institutions. Having implemented a Serrata, the Great Council banned
the use of commenda.

2. During the period of the empire, all elements of inclusiveness that existed in Republican
Rome disappeared. What were those elements of inclusiveness and how did they disappear?
During the transition from republic and empire, the partially inclusive political institutions,
which formed the basis for the economic success, were gradually undermined. Even if the
Roman Republic benefited the wealthy, it was not an absolutist regime and had never
concentrated so much power in one position.
The changes unleashed by Augustus, as with the Venetian Serrata, were at first political but
had economic consequences. By the 5 th century AD the Western Roman Empire had declined
economically and militarily.
The origins of the decline go back at least to Augustus’s seizure of power, which set in motion
changes that made political institutions more extractive. He changed the structure of the army,
which made secession impossible, thus removing a crucial element that ensured political
representation for common Romans.
Emperor Tiberius abolished the Plebeian Assembly and transferred its powers to the Senate.
Instead of a political voice, Roman citizens now had free handouts of goods and were
entertained by circuses. Emperors began to rely not so much on the army made up of citizen-
soldiers, but on the Praetorian Guard, a elite group of professional soldiers. The Guard itself
would soon fight to become emperor. Augustus also strengthened the aristocracy against
common Roman citizens and inequality.
Property rights became unstable because of the concentration of power in the emperor. State
lands expanded due to confiscation. Infighting to take control of a powerful position increased
and civil wars became regular. Septimius Severus, in the Year of the Five Emperors, seized
power from Didius Julianus.
The rising instability was evident as by the 3rd century AD every city had a defensive wall.
Changes in society moved institutions toward greater extraction. Though citizenship was
expanded, inequality also did. There were differences in the types of laws applied to different
categories of citizens.
Agricultural workers were reduced to semiservile status as “coloni”. The rights of landlords
over them increased as coloni were not allowed to sell their property without their landlord’s
permission.
The number of ships, Mediterranean trade, and deposits of lead, silver, and copper collapsed.
A man invented unbreakable glass and went to the emperor Tiberius but he killed him.
Emperor Vespasian, between AD 69 and 79, was approached by a man who had invented a
device for transporting columns at a relatively small cost but Vespasian refused to use the
innovation.
The Roman emperors had far more power to block change than the Roman rulers during the
Republic. Innovations were refused because of fear of creative destruction, which could be
politically destabilizing. The Roman plebeians had to be kept busy, so it was good to have jobs
to give them, such as moving columns.
Another reason for the lack of technological innovation was the prevalence of slavery. In Rome
the people producing were slaves and coloni with few incentives to innovate, since it was their
masters who benefited.