BROADCASTS.com

Published: Aug. 15, 2017, 1:36 a.m.

Spain and England colonized the Americas in very different ways. That led to different cultural values, which led to different constitutions. Mexico has had to update and rewrite the Constitution several times since the first one in 1824, because that one was a disaster. So let’s talk about how that constitution came to life.  

Napoleon invaded Spain in 1808, and sent the nation into a crisis. In September of that year King Ferdinand was captured, and he abdicated the throne. In response to this, several Spanish administrators declared themselves the new government, basically a government in resistance to the French. They formed a parliament that produced the Cadiz Constitution in 1812, which called for equality under the law, and a more democratic legal system.

Now the rulers of Latin America had to decide how to respond to this. They had been loyal to the Spanish Crown, which had put them in the positions they were in. But now Spain was preoccupied with the invasion, and so the Latin American rulers were given a little more space to make their own rules.

Independence and The Constitution

But Spain wasn’t totally distracted. A wave of independence spread over Latin America. The first movement was in La Paz, Bolivia in 1809. Spain sent troops from Peru to crush that one.

The Mexican response to the Spanish crisis was complicated by a movement in 1810 led by a priest called Miguel Hidalgo. Hidalgo and his men sacked the city of Guanajuato and then started killing every white person they could find. The line between class warfare and ethnic cleansing totally disappeared. Mexico’s elite at that time was largely white, and as they watched that little example of popular participation in local politics, they remembered the Cadiz Constitution, which called for even more popular participation. They could never embrace that kind of document.

So Mexico’s elite stayed loyal to the Spanish Crown. In 1815 Napoleon’s empire collapsed and King Ferdinand took the throne again. But he now faced mutinies and was forced to recognize the Cadiz Constitution as well as the parliament that had written it. The parliament was now becoming more radical and was calling for the abolition of slavery.

The Mexican elites watched this as well. They no longer had an ally in the Spanish Crown, so they decided independence was a better fate than adopting the Cadiz Constitution.

Those elites wanted Mexico to become its own independent constitutional monarchy. The man who led their independence movement decided that he should be the emperor. And he wasted no time giving himself dictatorial powers. He didn’t last long, but the cycle of dictatorship, coup, dictatorship, coup haunted Mexico for about a hundred years.

During those hundred years Mexico endured the disastrous misrule of Antonio Lopez de Santa Ana, the guy who attacked The Alamo and lost the Mexican-American War.

The extreme political instability in Mexico during the 1800s was, obviously, disastrous. Mexico lost about half of its territory during this period, including basically all of the American southwest.

Since the arrival of the Spanish, the Mexican elite had structured their society entirely around slave labor and monopolies, AKA extractive economic institutions.

So after hundreds of years of those extractive policies, by the time the Industrial Revolution rolled around, Mexico was in no place to take advantage of it.

In the United States in the early 1900s, people from most walks of life could get a patent to develop products. Once you had a patent, you could get a loan from a bank to start a business. By 1914 there were almost 28,000 banks in the U.S., and the competition was fierce. In Mexico at that same time, there were about 40 banks, and no competition among them, meaning there was no incentive for a bank to provide a better service than the bank down the street. Since there was no competition, the banks could charge huge interest rates, which basically meant that only the superrich could get loans, and then they could use that easy access to credit as a way of gaining even more control over the country.

The American Constitution placed huge constraints on executive power in the United States, but in Mexico there were basically no restraints, and the only way for someone to get rid of a president was the same way he originally took power: By force.

Presidents in Mexico violated property rights with total impunity, they expropriated tons of land, and they granted monopolies and political favors to their supporters.

The reason the United States banking system worked better for Americans than the Mexican system was because of the political and economic institutions of both countries. The stable banking industry worked in conjunction with political institutions that were much more democratic. So American bankers and politicians could try to corrupt each other, and were often successful, but politicians could be kicked out of office during the next election. A nation with extremely unstable political institutions can’t hold people accountable in the same way.

England’s Path to the Industrial Revolution

We don’t have time for a full recap of the conditions that put England and Spain on different roads, so if you want that, you’ll have to get the book. 

England’s road to the Industrial Revolution was long and winding and difficult. The elites fought every attempt to limit their power and make the nation more democratic, but in the long run those elites failed just often enough.

One important event was the signing of the Magna Carta. It was not “liberty and justice for all,” but it was a tiny step in that direction. The king was forced to sign it. Later the Pope annulled it for him, but the seed was already planted.

In the late 1400s the Lancasters won the War of the Roses. Their king, Henry VII, disarmed the aristocracy, basically giving the crown, or the nation, the monopoly of violence. Then Henry VIII and Thomas Cromwell turned the government into a set of bureaucratic institutions rather than what it had been before, which was just the private household of the king.

Acemoglu and Robinson’s thesis rests on the assumption that power needs to be centralized in a kind of Goldilocks balance, not too little, not too much. Too much centralization causes North Korea. Too little centralization causes Somalia. Without centralization, political institutions are not possible.

Henry VIII fought to make himself more powerful, and the elites underneath him fought against him, and they ended up indirectly making the government more pluralistic, making a system of checks and balances (more or less).

The institutions in England were still extractive at this point, but they were laying the foundations for England’s longterm success. As both sides fought each other, they were able to centralize the state just enough, but also limit centralization just enough so that absolutism didn’t creep in and destroy their longterm success, like it did in Spain.

Later, King James I did everything he could to become an absolutist ruler, but he had to fight a civil war over it, and he was defeated and executed. But a dictator replaced him.

After this long series of conflicts came more conflicts that we don’t have time for. But since you’re a podcast listener you’ll be able to find podcasts that go into these topics in ways that I just can’t. There are probably at least 6 podcasts on the history of Great Britain.

The path to longterm national success is not obvious, and it was even less obvious in England before the Industrial Revolution.

The Industrial Revolution

The Industrial Revolution began with transportation and textile. As you might guess, it was not a straight/simple path forward. One family invested £6000 of their money to make a river navigable, and in exchange the government granted them the right to charge people for navigation on the river. But the government tried to backpedal, and so they had to go back and forth fighting it out. The issue was resolved in favor of the family, thereby setting a precedent and demonstrating to the people that their property rights would be respected.

If we compare that with Venezuela today, we see a place where the government can walk into any private business and say, “This now belongs to me.” Nobody in Venezuela has any reason to open a tiny café or a corner store in their neighborhood and hire a few neighbors (in a country with at least 25% unemployment, by the way). People know that if their government sees them being successful, they could lose everything they worked for and have to start all over from zero. So it’s smarter to not do anything.

England avoided becoming Venezuela in part because people believed their property would be secure. There are lots of other factors, but that one is key.

At any point in England’s development, the wrong person could have come into power and could have held onto it for too long, but luck as well as virtuous cycles or positive feedback loops put England’s economy in the best position for longterm success.

So the Glorious Revolution in the late 1600s increased pluralism and led to the creation of the Bank of England, which sparked a financial revolution. People could then take out loans and start businesses, which gave more power to the commoners, which in turn created even more political changes that kept the cycle improving decade after decade.

The political and economic institutions became more favorable to innovators and entrepreneurs, and property rights got more secure. That played a role in the transportation revolution, which laid a foundation for the Industrial Revolution.

England also made smart use of economic nationalism and protectionism. Just as companies are in constant competition with each other, so are nations. The government made it illegal for foreign ships to carry products to England or its colonies, and they made it illegal to transport English products on foreign ships. English trade had to be transported on English ships. This obviously encouraged English traders and manufacturers to continue innovating and looking for profitable activities.

Property rights were improving, infrastructure was improving, more people had access to finance, and manufacturers and merchants were protected overseas. In 1760 the number of patents jumped way up as a result of people’s faith that they could benefit by going into business.

But, as I’ve mentioned at least twice now, it wasn’t simply a complete and steady improvement. People tried to set up monopolies and tried to change laws to make it illegal to compete with them, and the government tried to weasel out of agreements, but the general trend was positive.

A strong economy is a changing one. An economy is a living organism, and the only constant for a living organism is change. Death is a part of all living things. Skin cells die and get replaced by new ones just like old industries die and get replaced by new ones.

Anticapitalists like to use periodic market contractions as evidence that capitalism will soon fail, but that’s kind of like saying humanity will soon go extinct because so many of them die. Humans are not eternal, and neither are businesses or industries.

It’s a process called creative destruction. It’s a scary process. It creates winners and losers. And ultimately that is why most countries are poor. The people who are scared of creative destruction have held too much power for too long. They are scared of change because they very well could lose in a competitive economy.

As cotton started booming in England, the wool industry declined. New technologies were invented to speed up the production of cotton fabrics, and that meant people who wanted to join the cotton boom had to learn to use those new machines. People who adapted to the changes survived and prospered. People who could not adapt did not.

Path-Dependent Change

The world economy exploded during this era. The leaders of extractive countries could get rich by exporting natural resources to the nations that were expanding.

I’ve already talked about Mexico during the Porfiriato, which is the 30-year dictatorship of Porfirio Diaz. If you want more about that, you can listen to the episode called Revolution 1.1.

Mexico underwent big changes during his rule. But these were what Acemoglu and Robinson call path-dependent changes.

Since these resource-rich countries with extractive institutions were already on that path, the path of extraction, the changes that took place were simply an evolution of the processes that had already impoverished them.

Globalization made the frontiers economically valuable. Large, open spaces that took forever to cross by horse were now seen as areas filled with valuable resources. The people who lived in those areas were not able to defend themselves, and so they were pushed out.

As a tangent, that moment in history, colonization and the forceful dispossession of people from their lands, gives us an extremely powerful lesson for today. Cultures that are not strong will always be trampled by people from other cultures who are hungrier and better-organized. If we take nothing else away from the history of cultures interacting with each other, we need to take that lesson. It’s true in international relations as well as business. Stronger, hungrier, and more desperate companies can put others out of business, like Amazon did to bookstores.

Remember, Amazon was not as big as Borders Books or Barnes & Noble. But it was hungrier and smarter. Apple did it to the music industry. When successful companies and successful nations grow complacent, when they get too comfortable, that’s when disruption happens.

So the newly-discovered value of those wide open spaces led to more divergence between the U.S. and Mexico, because both countries reacted to those wide open spaces in different ways.

The indigenous populations in America were pushed out of their land, and then the United States gave broad access to those frontier lands. This made those lands economically dynamic, in the words of Acemoglu and Robinson, as well as somewhat egalitarian.

In Latin America the same dispossession happened, but those lands were not then made broadly accessible to the public. They were given to the politically powerful, which allowed the elite to concentrate their wealth and expand their power even further.

Porfirio Diaz used the opening of frontier lands as a way to enrich himself and his allies. He sped up the cycle of extraction. And of course there were consequences for him, and you can’t just flat-out condemn every single thing that happened under his rule. But he continued Mexico’s path of extraction.

Extractive institutions can cause economic growth, but only for a limited time, and only in limited quantities. Extractive economic policies don’t work in the long term. And so eventually Diaz was overthrown, but Mexico was sent into at least a decade of chaos afterwards, and probably closer to 15 or 20 years of chaos.

This pattern of extraction, like I said, causes short-term growth, but it comes at a very high price to the country at large. There were civil wars, coups, revolutions, and economic stagnation all over Latin America through basically the entire 20th century as a result of the Spanish Crown’s original extractive policies. There was a revolution in Mexico in 1910, in Bolivia in 1952, Cuba in 1959, Nicaragua in 1979, and civil wars in Colombia, El Salvador, Guatemala, and Peru, and attempted agrarian reforms in Bolivia, Brazil, Chile, Colombia, Guatemala, Peru, and Venezuela. For many Latin American countries, democracy didn’t arrive until the 1990s, and even today they’re not very stable.

In my own opinion many Latin American countries have made great strides toward developing more inclusive economic and political institutions, and even where they have failed to make improvements, the internet is a tidal wave rolling over Latin America and letting the people communicate with each other and conduct business even if their governments are doing everything possible to keep the old extractive models in place.

At least in Mexico almost everyone I know who’s my age or younger has a Facebook account, which means they have regular access to the internet. The internet is probably the most powerful economic equalizer in world history.

Unfortunately 97% of those people will use the internet exactly like Americans and Europeans use it, as a way to waste as much time as possible rather than learning something valuable. You can give people an equalizer, but you can’t force them to use that equalizer to get the equivalent of a university education every two years if they’d rather watch 30-second Facebook videos all day.

Monopolies

The authors of Why Nations Fail illustrate the modern difference between the United States and Mexico by using the example of two of the world’s richest people: Bill Gates and Carlos Slim. They say Gates largely became successful through innovation, and they point out how the monopolistic tendencies of Microsoft were punished by the U.S. Government. In 1991 the Federal Trade Commission investigated the issue of whether Microsoft had become a monopoly. The U.S. Department of Justice filed a lawsuit against Microsoft in 1998 claiming the company had abused monopoly power, particularly by tying Internet Explorer to the Windows operating system. In 2001 the company reached a deal with the government. They didn’t face the penalties many people had wanted, but they didn’t get off scot-free either.

Carlos Slim, on the other hand, got his money through intelligently manipulating the legal systems of Mexico. His initial success came through stock market deals and through buying and revamping failing businesses. The government privatized a telecom company Telmex in 1990 and did the thing that seems reasonable to socialists, they turned it into a state monopoly. Then they sold it to Slim, turning a state monopoly into a private monopoly.

If you’re a Mexican entrepreneur, you face huge obstacles, including expensive licenses, truly labyrinthian red tape, and a financial sector that colludes with your largest competitors.

Slim is a smart man who simply uses the system to his advantage. But Mexico is becoming more competitive, and Carlos didn’t build his empire by being the strongest competitor. He did it by finding loopholes, and loopholes are not a longterm economic strategy.

As Mexico becomes more competitive, it gets more and more important for individual citizens of Mexico to get ahead of the curve. It is the world’s 15th largest economy, and now in the internet age every business with an online presence has to compete globally. Mexico might not be the easiest place to start a business, but I see a lot of ways in which it is somewhat easier than where I come from.

I don’t want to turn this into a tangent on doing business in Mexico, so I’ll keep this short, but the level of business sophistication in Mexico is extremely low, which makes it easier for Mexicans to outperform their competition simply by being dedicated to their customers and willing to go to the bookstore and buy a couple business books every month.

I’m not saying it’s easier in Mexico, but your competitors are extremely unsophisticated and unwilling to invest profits into their business. That counts for something.