An Interesting Perspective on the Failure of Incentives

In his new book, "Why Countries Fail", Daron Acemaglu argues that the economic success of a country is most closely correlated to the degree in which the average individual shares in the growth of the economy. This concept relates both to failures that have occurred in strictly (or primarily) capitalist economies as well as socialist economies.

If income inequality becomes too extreme, poorer workers have less incentive to work hard because any generated surplus will be taken by the elite. Adam Davidson gives the example of Haitian mango farmers, who had the expertise and resources to vastly expand their production, but did not because they also had the legitimate suspicion that a more powerful member of society would claim title to their land. This is a failure of the market, as property rights are not safely owned, rather than a failure of the perfect market system. However, corruption is an observable trait that frequently increasing when the balance of power shifts towards extreme inequality.

Although Davidson in his article does not address the relevance of Acemaglu's ideas to socialism, it is not hard to see that the lack of incentives that we have discussed in class relates to the individuals ability to share in the growth of the economy. Workers in socialist systems do not receive continual extra benefits for innovation or additional work, so their ability to create personal economic gain alongside the economic gain of the society as a whole is limited.