The Koch Brothers, The Cato Institute, And Why Nations Fail

By Simon Johnson

A dispute has broken out between the Cato Institute, a leading libertarian think tank, and two of its longtime backers – David and Charles Koch. The institute is not the usual form of nonprofit but actually a company with shares; the Koch brothers own two of the four shares and are arguing that they have the right to acquire additional shares and thus presumably exert more control. The institute and some of its senior staff are pushing back.

According to Edward H. Crane, the president and co-founder of Cato, “This is an effort by the Kochs to turn the Cato Institute into some sort of auxiliary for the G.O.P.” Bob Levy, chairman of the Cato board, told The Washington Post: “We would take closer marching orders. That’s totally contrary to what we perceive the function of Cato be.”

Far from being just an unseemly row between prominent personalities on the right, this showdown reflects a much deeper set of concerns for American politics and society. And it raises what I regard as the central question of an important book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty,” by Daron Acemoglu and James Robinson that will be published on March 20.

Professors Acemoglu and Robinson assert that “institutions,” by which they mean the rule of law and constraints on government power, are critical to economic development – having great influence on which countries become rich and stay that way, and which countries over the last 200 years have failed to grow or collapsed into civil disorder. (Disclosure: I have done a great deal of joint research with Professors Acemoglu and Robinson, but I wasn’t involved in writing this book.)

At one level, the Acemoglu and Robinson argument lines up well with the standard Cato Institute – and libertarian – view of the world. At the back of Cato publications is the statement, “In order to maintain its independence, the Cato Institute accepts no government funding.” Without question, excessive power in the hands of governments can be bad for economic growth.

But the Acemoglu and Robinson point is not just about how things may become awful when the government goes off-track (a right-wing point). They are also more deeply concerned about how powerful people fight to grab control of the state and otherwise compete to exert influence over the rest of society (a left-wing perspective).

The outcome to fear is some form of “extractive institutions,” meaning a set-up in which most of society is pressed down by working arrangements – e.g., various forms of forced labor – or civil disorder or a more general lack of property rights. They provide many historical and contemporary examples of what this means in their book (and you can see previews of some items, nicely illustrated with photos, on their blog).