This is a paper I wrote for the class "Political Economy of the Law" examining institutions.
The Characteristics and Effects of Extractive and Inclusive Institutions
Institutions have a substantial impact on the way societies develop and on their long-term fortunes. To try to change society, attention should be given to the institutions that exist at every level of our society. Institutions include both organized structures enshrined in law as well as wide-spread practices that dominate areas of a society’s way of life. Constructing new institutions and reforming existing institutions is a difficult and complicated process. Understanding the effect that the quality of institutions has on society is essential in determining how to best undertake the task of changing a society’s institutions. The concept of extractive institutions has been used to describe the quality of institutions and analyze their impact on the economic fortunes of different countries. This paper explores the concept of extractive institutions and the continuum between extractive and inclusive institutions. There has been considerable investigation into extractive institutional effects on the economic structure and comparatively less on the effect on a society’s culture. This paper attempts to broaden the analysis to include cultural effects to get a more holistic view of the situation.
The Characteristics of Extractive Institutions and Their Effects
At their core extractive institutions are predatory. They have the effect of enriching an elite by extracting resources from another group, the target group. The system of slavery that existed in the United States before the Civil War is an example of this kind of institution taken to the extreme. The labor and wealth produced by slaves went entirely to the slave masters and slaves lived in extreme poverty under torturous conditions. Additionally, the white population in general benefited from cheap production and cheap goods. Present day extractive institutions do not usually compel forced labor and keep people in bondage the way slavery did. The American prison system and its labor practices are an exception to this, preying upon prisoners through the exception to the 13th amendment and minimum wage laws. In the federal prison system, able-bodied inmates are required to work for a very low wage. The effect of this extractive system is to concentrate the wealth produced by prisoners in the hands of private prison companies, the prison system, and the companies that prison labor is farmed out to. Most present day extractive institutions are not like the prison system, though. They manage to gain the agreement of their prey through monopolizing areas of the common way of life. The property rental institution is one such system, where the renters agree to pay for the right to use a property for a certain period of time. Landlords can accrue large profits from simply owning title to property. While landlords do have the responsibility to repair and manage their property, this system still has the hallmark of extracting wealth from one group and concentrating it in the hands of another. Landlords structure their business so they pay mortgages with rents, a system where the renter is essentially paying for the landlord to own the property.
Extractive institutions develop and perpetuate hierarchies and inequality. For example, the landlord has ultimate control over their property and how the renter uses it just as the prison guard has control over the ebb and flow of life from the prisoner. Historically, extractive institutions were heavily employed by European countries in their colonies, with the exception of settler-colonies. Slavery was one such institution, as was the plantation, and extractive taxes regimes. The goal of these institutions was to increase the profits of the colonizer and send wealth back to the colonial powers. The Europeans often took over existing ruling institutions and tax and tribute systems and created ones where it suited their interests to further this goal. Europeans placed themselves at the top of the hierarchy and created a mythology to justify and explain their “right” to rule. High levels of economic inequality tend to develop in societies dominated by extractive institutions. This can be seen in the Caribbean, where colonies were set up to produce sugar through slavery and plantations. A small European elite ran the plantations while the mostly African slaves worked the land, and the elite retained all the profits. Those countries mostly remain severely unequal today. It makes perfect sense that extractive institutions produce inequity because they tend to sequester wealth in the hand of the few and remove that wealth from the rest of the population. Over time, more wealth is concentrated and the situation of the majority of the population becomes more and more desperate. Because the elite profit so much from extractive systems, they try to strengthen them and fiercely protect them when they come under threat. This is another feature of extractive institutions; the elite perpetuate and protect the system over objections and attempts at reformation. Many former colonies maintain extractive institutions because the elite have managed to resist reforms. The history of the United States is a testament to how extractive institutions can preserve and even reincarnate themselves. When slavery was abolished, a penal system was developed that essentially made slaves out of the inmates in the South. Jim Crow laws restricted the rights of African-Americans to maintain an extractive hierarchy. Share-cropping systems kept African-American farmers in a perpetual state of poverty while the owner of the farmland profited immensely. After the fall of Jim Crow and the successes of the Civil Rights Movement, the penal system again became a way to maintain a racial hierarchy. The prison population started ballooning in 1980 and continues to increase today. Entrenched institutions have way of being reborn precisely because there is an elite invested in recreating the benefits of a system that has fallen. In the long run, however, extractive institutions hurt growth and the economy. According to Daron Acemoglu in his article Root Causes, extractive institutions have historically hindered growth by preventing investment and innovation. Acemoglu notes the pattern of the elite in a given country preventing industrialization because it threatens their position. Their power and privilege depends on the relative depravation of a target group, so anything that threatens that relationship threatens the extractive institution’s existence. New innovations that help grow the economy are attacked because they often spread wealth around instead of only to the elite. A present day example of this is with the internet, which has been under attack for the last decade by a variety of industries, such as the music industry as well as other groups of copyright holders. Their attempts to limit the flow of information stem directly from their position as elites who extract wealth from selling licenses to use the information that is now being freely shared on the internet. The socio-cultural implications of extractive institutions are significant and disruptive. European colonial empires created the modern version of racism, a mythology that still dominates the worldview of billions of people. These kinds of hierarchies are perpetuated by extractive institutions and cause social fragmentation and strife. The Rwandan genocide occurred, in part, because extractive institutions reified the differences and hierarchy between Hutus and Tutsis. The American Civil War was fought over slavery and the attempt to end that hierarchy. There is a lasting impact on the African-American community and their family structures from the institution of slavery. Some scholars have drawn a direct connection between slavery and the disruption of the typical family institution the African-American community. This disruption is perpetuated still by the penal system and its targeting of African American men. Such social disruption usually helps maintain the power of the elite and reinforce the extractive institutions. Additionally, economic inequality creates a host of social problems which, over time, become ingrained into the culture. An increase in stigmatization of the poor is one such effect, as well as the disempowerment and disenfranchisement of whatever group the extractive institution is targeting. The focus of disempowered groups also changes to taking over the reins of power, to gaining the wealth and privilege of the elite instead of on changing the institution and creating a more inclusive society. Focusing on taking the place of the elite is not a particularly effective way to alter an oppressive system, since even if the elite are overthrown, a new elite will establish itself from the ranks of the disempowered group and perpetuate the extractive institution.
Partially because of so much social disruption, extractive institutions must be justified to have legitimacy and maintain their dominance. These justifications tend to have serious negative cultural consequences in themselves. Racism was one justification that was developed to justify slavery. Another common justification is that the targeted group of people is less responsible and able to make an income. Dehumanization of a preyed-upon group is a red flag when looking for extractive institutions, it is much easier to extract wealth from people who “don’t deserve” wealth than from peers. Violence is the backup when these justifications fail to keep people in line, and violence comes with its own host of negative socio-cultural effects.
Whatever form this justification takes it tends to undermine the self-esteem and capacity of the targeted group of people and also to undermine the possibility for collective action since that is a serious threat to the status quo. Members of institutions that tell them they are worthless and not fully human tend to start thinking of themselves that way whether they want to or not. These culturally constructed categories seep into people’s mind and frame their identity and worldview, and can have long lasting impacts on the families in the targeted group. Additionally, the lack of resources and fragmentation of society increases crime rates which break down levels of trust. As people become more financially insecure, their anxiety generally lowers their quality of life and can cause cycles of abuse to develop. The elite are also harmed by their extractive institutions. Since the justifications extractive institutions use tend to say that the elite are better in a large number of ways than the targeted group, this perception becomes part of the elite’s identity. Thus, when a member of the targeted group does something well, the elite feel humiliated. This is the situation the racist members of the white population in the United States face, and their feelings of humiliation come across pretty clearly in their rhetoric. The elite also experience a loss of moral compass and alienation from society at large. Paranoia is a possibility as is living with a substantial amount of fear because the trust they have in others has been so eroded by their position in the extractive system. When a person hurts another person they also cannot help but be negatively affected by it, due to the structure in the brain called mirror neurons. This brain pathway essentially forces them to empathize with the emotions people they see are experiencing. So when an elite member of an institution hurts someone else the elite member will feel the other person’s pain and additionally feel guilt of causing the pain. The elite live with this emotional burden and it takes its toll. Justifications for the institution and dehumanization are used to try to mitigate these feelings and make it easier to ignore the pain of the group the extractive institution targets. An additional purpose of justifications is to construct the reality of the population in such a way as to make the institution seem natural. When an institution is perceived as natural it is much harder to question or even to recognize the institution and name it. Similarly these justifications seek to limit the imagination of the population so that it cannot develop a parallel institution to replace the extractive one. The most difficult extractive institutions to change are the ones that are so deeply believed in that life seems impossible without it.
Inclusive Institution Characteristics and Effects
In Why Nations Fail the authors describe inclusive institutions as, at their core, including a wide range of people in the society in the economic and political institutions and working for the welfare of all their citizens as well as society in general. Barriers to entry are discouraged and everyone has the opportunity to participate in the institution. The authors focus on the economic institutions that encourage a level playing field and the entry of new people and businesses into the economy. Wealth is spread around the population and generally not concentrated in an elite. Equality brings many benefits; it encourages new technology to be developed and new ways of organizing people. Old ways of organization are not able to maintain their grip on the society to prevent development. Of course, the authors assume that an increase in productivity and economic growth are inherently good. They do not seem to address the possible social disruption that can come from the churning of the economic engine and the commodification of labor, property, and money. In addition to equality, inclusive institutions encourage investment in the people involved in them. Education is a high priority in societies dominated by inclusive institutions since a solid base of understanding is essential to participate in many social institutions. The slash and burn approach of extractive institutions provides a stark contrast to inclusive institution’s investment in human capital. A strongly educated citizenry can make the most their participation in economic and political institutions, increasing their reliability and effectiveness. Additionally, education provides a social structure to reinforce a common set of values and beliefs, whether consciously taught or not. One reason the Civil Rights movement focused on integrating schools is because of the power of first-hand experience in changing minds. Racists had a much harder time maintaining their racism after getting to know people of other races. Participation would also seem to be an important characteristic of inclusive institutions. For political institutions, this means that power is shared among the population and not centralized in an autocratic elite. Checks and balances on the powers of an institution are also characteristic of inclusive institutions, to prevent the arbitrary use of power. Overall this prevents the use of an institution for the benefit of only a few people. Democracies tend to have more of these characteristics, although they can slowly creep toward becoming more extractive. Widely held power is one of the most important features of sustaining an inclusive institution, since without it there will be little to stop elites from establishing themselves. Inclusive institutions have a fundamentally different purpose than extractive institutions, working for the benefit of the whole community and “growing the pie” so to speak, instead of taking wealth from one part of the community and concentrating it in another part. Because of this purpose, justifications to legitimize the institution are much simpler then for extractive institutions, focusing on helping people and improving the social situation. The institution’s effectiveness at achieving inclusive goals often gives them legitimacy in itself. While there is very little exploration in the literature of an inclusive institution’s ability to build relationships among members and repair social bonds this seems like an important and powerful institutional characteristic. This feature is present among relational institutions that function through the relationships people have compared to formal organizations that emphasize the impersonal nature of the interaction. Formal organizations prefer to standardize interactions in an attempt to ensure equity while relational institutions emphasize a person’s status and relationships with other people to operate. While relational institutions can operate to create barriers to opportunity and support extractive institutions, they can also operate to create more social bonds and grow the web of relationships that society is made of. Formal institutions have more difficulty with creating or repairing relationships among their participants. For example, the criminal justice system in America generally ignores victims and their needs while simply punishing offenders. There is no room for catharsis or repair of the damage done. Restorative justice is an alternative method used in some places around the world that actively tries to repair the harm done and restore the web of relationships that is damaged by crime. This system is generally more democratic and inclusive, giving more power to the individuals involved in the process instead of an elite of judges and lawyers. This is an example of an inclusive institution that is also relational in the sense that it connects people together and builds relationships which further develops social cohesion. With greater social cohesion, equality and participation, social problems are easier to tackle. Communities are not burdened by an elite’s deliberate efforts to fragment them and are able to find inventive solutions to social problems and enact them. The population will gain a sense of empowerment and be more willing to make hard changes to address problems. Participation and education help a population to become self-assured and not burdened by the self-esteem problems associated with extractive institutions. Inclusive institutions focus on the long term goal of maintaining a society that cares for the welfare of all of its members and this can set a powerful example for inter-personal relationships. This moves a population’s view away from the instrumentalist approach championed by extractive institutions that encourages people to see others as instruments for their use instead of peers to collaborate with. The change is slow and can occur in both directions. Indicators in the United States seem to point toward movement to a more extractive focused set of institutions. Increased inequality and concentration of wealth in the hands of a small elite are telltale signs of the increasing domination of extractive institutions. Dehumanization of the poor has also been increasing in the last thirty years. Education is less of a priority and is being defunded. Social control systems, such as the prison system, are gaining power to attempt to control the social disruptions developing from increasing extraction. Indeed, the prison system itself is an extractive institution which is more able to flourish under a more extractive society. Part of this is likely the shift in political power. The government in the United States has become less and less powerful as corporations increase their ability to influence the government as well as increasing their own wealth. Sadly, many corporations seem to fit the description of extractive institutions and, as they grow more powerful, they are able to adjust the socio-cultural environment to make it more hospitable for extractive institutions.
Continuum Between Extractive and Inclusive
In Why Nations Fail, the authors set up a continuum between extractive and inclusive institutions. They suggest that each kind of institution tends to support and promote similar institutions while disrupting and preventing the formation of other kind of institution. While they try to simplify this categorization by making it black and white, it seems like there is more grey area. Institutions can function to both extract wealth from targeted groups while trying to be inclusive through broadening the elite who collect the wealth. Governments can serve in this capacity, as well as being more purely extractive or inclusive, although they have trouble maintaining participatory systems. Through taxes, governments can extract wealth for the common good and the benefit of the whole community. Governments might even focus primarily on extracting from the elites of private extracting institutions through progressive taxation. One historical example of a cultural institution that seems both extractive and inclusive was the Jubilee of ancient Israel. The Jubilee required the freeing of slaves, the cancelation of debts, and the returning of all land to its original owners every 50 years. This essentially re-distributed property to preserve the presumably more egalitarian land distribution set down when the tribes of Israel first settled. This institution was extractive in the sense that it took wealth from the rich and inclusive because it re-distributed it broadly across the society. While there are several religious explanations for why this was the law, it seems to be a direct attack on extractive institutions with the purpose of addressing and preventing the social ills that develop in a society dominated by extractive institutions. It forced relative wealth equality by preventing the concentration of land in the hands of a few people and enforced equity among debtors and creditors. Of course, the law eventually fell out of use, but it seems like a very direct method to confront the negative effects of extractive institutions when those institutions cannot be replaced through using an institution that combines extractive and inclusive characteristics.
Similarly, some institutions in America seem both extractive by sequestering wealth from a target group but inclusive because it is not difficult to become part of the elite. Shareholding is peculiar creature in this regard because corporations are designed to extract wealth from customers and workers and disburse it to shareholders. Yet, anyone who has a small amount of money can buy a small amount of stock and become a shareholder. Even with a small amount of stock, though, the wealth extracted would not be substantial and the main barrier to entry is the amount of wealth one can devote to owning stock. Thus corporations tend to distribute most of their extracted wealth to wealthy stockholders who own substantial amounts of stock. This is not an extreme case of an extractive institution because the elite is much more permeable than, for instance, the institution of slavery.
Conclusion
To sum up the characteristics of extractive institutions, they are hierarchical, predatory and hierarchical, focusing on extracting resources from a target group and concentrating that wealth in the hands of an elite. Historically, they often compelled their target through force, but today they tend to gain the agreement of the target to the extractive arrangement. Of course, the target may feel that they have no other choice but to agree. They try to justify themselves by dehumanizing the target group and tend to produce substantial economic inequality along with a host of social disruptions and fragmentation.
Inclusive institutions, on the other hand, seek to be participatory and include as many people as possible in their operation. They attempt to educate their member and invest in them. Their purpose is generally to increase the size of the pie and share it more equally as opposed to the extractive approach of taking as much of a fixed pie as possible. Their impact on society tends to be constructive and healing, building the self-esteem and security of their members. This is especially true of a subset of inclusive institutions that focus on developing relationships among members and healing harms that has occurred.
Institutions can have a myriad of these features and do not have to neatly fit into either of these categories. These characteristics should be considered in creating new institutions and reforming old ones because they can be correlated with certain effects on the society and culture of the institution’s members.
Bibliography
Acemoglu, Daron, Simon Johnson & James Robinson, Reversal of Fortune: Geography and Institution in the Making of the Modern World Income Distribution, (National Bureau of Economic Research Working Paper Series No. 8460, 2001), available at http://www.nber.org/papers/w8460.pdf?new_window=1
Acemoglu, Daron & James Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (Crown Business, 2012).
Chaudhry, Kiren. The Myths of the Market and the Common History of Late Developers. POLITICS & SOCIETY, Vol. 21 No.3, September 1993 245-274
Perea, Juan F., et. al. Race and Races: Cases and Resources for a Diverse America 110-171 (2nd ed., 2007).
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