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An Interview with Daron Acemoglu, MIT Economist

Mr. Acemoglu is the Killian Professor of Economics at MIT, where he focuses primarily on the field of political economy. As the author of hundreds of articles in refereed journals, Mr. Acemoglu is the most cited economist of the past 10 years and the third most influential economist according to IDEAS/RePEc. He is also the author of four books, including The New York Times bestseller Why Nations Fail: Origins of Power, Poverty and Prosperity (2012). He has twice been named to Foreign Policy’s Top 100 Global Thinkers and received numerous awards, including the recent Knowledge Award in Economics (2017). Among numerous other positions which he holds, he is the recipient of the Andrew Carnegie fellowship, previous Editor-in-chief of Econometrica, and elected fellow of the National Academy of Arts and Sciences, the Econometric Society, and the European Economic Association.

The Politic: By 2011, the average U.S. resident’s inflation-adjusted consumption was $132 per day, which is 40+ times greater than in 1800. How can you explain that within your framework?

Daron Acemoglu: One of the main achievements of the world economy over the last 200 years is that many countries, most notably the U.S., have become 60 to 70 times richer than they were at some point towards the end of the 18th century. I think there’s very little disagreement among economists that that is almost entirely due to technological change and investments into physical and human capital. What is somewhat less clear is what really triggered the change in the path of technological change and all the things that came with it. My framework argues that the institutional environment in what’s broadly called the ‘West’–parts of Western Europe, the United States, and Canada–enabled people to invest unencumbered in new technologies. This institutional environment also enabled them to implement these new technologies and new investments once they were made without being blocked or without being persecuted. It provided the financial market, the labor market, and the security for them to scale up the investments so that the productivity improvements could be realized once these inventions were made and were adapted to production processes. You see that in the UK, for example, with the Industrial Revolution, first in textiles, then in metal, transport, and other areas of manufacturing, and then in services. That’s the same process that actually started a little bit later in the U.S. but went on even faster in the second half of the 19th century.

What are the different factors that lead one country to have strong political institutions relative to another country?

I think that’s a critical question, and unfortunately, it’s one that we still only have a partial understanding about. There are several aspects to it. The first is obviously historical. Institutions tend to persist, and if you start from a situation in which you have 2000 years of what we’ve called ‘extractive institutions,’ where political power is concentrated in the hands of a small group of people who can exercise it despotically without any constraints, that’s not going to lead overnight to an inclusive environment in which political power is shared and democratic norms and institutions develop. Another aspect which my co-author James Robinson and I emphasize a lot is society’s participation, in contrast to a popular view in the U.S. that you create good institutions by writing good constitutions which introduce and enshrine things like checks and balances– what Madison, Hamilton, Washington, and all Founding Fathers worked on.

I think that’s extremely overrated. You can write many constitutions, and many countries have done so many times. It doesn’t mean anything. What is really distinctive about most societies that have inclusive political institutions is that they really do include people in the political process. And for that we need society, meaning people who are not the elites, who are not the economic elites, who are not the military elites, who are not the political elites in the country, to become mobilized and participate in political decision-making through a variety of channels like the media, civil society organizations, political parties, protests, and other ways of voicing their discontent.

Some modern societies are relatively inclusive. To what extent do you think those societies have relied on extracting from other economies, or exploiting labor from other economies, and to what extent do you think that’s been a necessary component of success for building inclusive institutions?

I don’t think that it is a necessary component, although it certainly is something that has happened in history. During some periods of their march towards greater inclusivity, the U.S., Europe, especially Britain but to some degree France, and the Dutch have benefitted from exploiting their colonies, or being extractive in other parts of the world while they were becoming more equal domestically. But I don’t think there is a great necessity in that process. Now, that’s not to deny that, historically, extracting from other societies might have been important. In the British case, for example, the opening of the Atlantic trade destabilized the monarchy-dominated political system and enabled new interests to emerge.

But, it’s not that extraction abroad fed inclusivity at home. In fact, one way of seeing that is other cases like Scandinavia or Switzerland, which have gradually become more inclusive over time in a process that went on for two or three centuries but haven’t really taken a systematic part in colonial activities and haven’t based their economies to any degree on imports of colonial produce. So, I don’t think there is any necessity of that sort. And then, more recently, there are many countries like Botswana, South Korea, Taiwan, and to some degree Japan which have made huge advances in building more inclusive political institutions and more inclusive economic systems without any external, extractive relations.

In fact, I think the opposite view is to some degree correct because extractive and inclusive elements don’t always work well together. The best case in point is the U.S., where for 70 years after the U.S. Constitution, the South was highly extractive based on slavery and the North had more of these inclusive elements, and the two cohabited but not happily. The tensions were visible from the get go, and ultimately those tensions were resolved, unfortunately, in a bloody manner with the Civil War. That’s not an unusual pattern.

The other point that is useful to note is that building inclusive institutions is a process. It takes time. South Korea started with a highly repressive system of holding wages down and manufacturing under General Park [Chung-hee], and military dictatorship thereafter, but over time became more and more economically inclusive and politically inclusive due not only to a number of structural factors but also political activity from various segments of society.

Recently, I read an article that said Apple’s $1 trillion valuation would make it the 15th biggest stock market in the world. Have you done any work that compares governments as institutions and private companies as institutions?

That’s a great question. I think there are many levels at which this is something that needs to be investigated. First, we know the parallels. Every organizations has the same problems of, for example, conflict of interest and who has the power and can block others. Those are relevant issues. And in the same way that nations fail when they empower one individual or one group at the expense of others, which impedes new ideas, the same happens in organizations.

Second, we know the differences. Democracy is critical for companies because that’s the only way in which you can give people a voice and make sure that they are not forced to be in situations where they are unhappy, they are exploited, or they are dominated. But there are many companies. Some of them are run dictatorially by their owners, and others are different organizations, and the labor market allows people to freely move between companies. That may not be disastrous. Nobody will deny that Apple has been a success. But if you look at the early stages of the company, it was not run democratically. It was the brain child of Steve Jobs, and it became successful when Steve Jobs ran it according to his vision without listening to anybody. But that wasn’t a huge problem, because Apple was a small company and people that didn’t like Steve Jobs, his vision, or being bossed around by him could go to another company. And that was fine. But that’s not something that’s available for people. In general, you might not like the current government of the U.S., but it’s very possible for you to go and live in another country. That’s the difference between firms and nations at some level.

Having said that, and this is the new face of it, this is very meaningful when we are talking about companies that are trivial in terms of their size compared to the economy. However, Apple, Google, and Amazon are no longer trivial in terms of their size. They’re huge. And when companies become so huge, there are all sorts of new fronts to think about. Are they becoming dominating? Are they becoming monopolies? Are they becoming monopsonies? Are they setting the agenda for innovation? Are they setting the agenda for what types of new products are being produced? So, I am actually quite concerned about the size of companies like Apple, Amazon, Netflix, and Facebook, especially because they control things which we didn’t think were so critical in the past but we now understand are vital for the functioning of modern life and modern social and political discourse. That has implications. I haven’t really investigated this in great detail, and neither has the economics profession at large, but I think it’s a very important issue to be thought through.

Did you have any initial reaction to seeing Mark Zuckerberg or Sundar Pichai go up in front of Congress?

I think that’s not where the action is going to be at the moment because those are PR exercises. The fact that Facebook is getting attention from the political parties is very important and a very positive development. But I believe it’s going to be a process. Really, where the congressional lawmakers drill Mark Zuckerberg or Sheryl Sandberg is secondary. The primary question is whether they’re going to adopt regulations which ensure that these companies don’t become too dominant, cannot lose their dominance, or cannot benefit in ways that harm the public interest. Another important question is whether the public will remain interested in this issue so that they actually force their representatives–however unrepresentative and unaccountable they are today–to actually take action on the issue. And it’s not easy. I think Europeans have done much better in the context of anti-trust, tax dodges, and their General Data Protection Regulation for privacy. The U.S. is certainly, certainly lagging behind on that.

What do you think are the biggest ethical issues related to economics that people don’t frequently talk about?

That’s a great question. I don’t really know. I think there are so many underdiscussed issues, and I don’t think any single one of them is really much bigger than the others. In an ideal world, you want to think of economics, just like other scientific disciplines, as an area which is advancing our knowledge and is providing us with useful knowledge for improving our lives, our surroundings, and our environment. Economics is a social science, but it has a lot in common with disciplines like biology and physics. It has complex hypotheses which are then tested on imperfect data. But that’s in an ideal world. In reality, economic knowledge is also a tool for political struggles. Economic theses, correctly or incorrectly, are used daily in political arguments, whether it be trickle-down economics, ‘Free to Choose,’ taxes are good, unions are good, taxes are bad, or unions are bad. And that really creates a lot of fault lines in the discipline.  

Here are two fault lines I would think are very important. First, people tend to use incorrect or oversimplified economic arguments in political discourse, sometimes with disastrous effects. I think that has been done a lot with right-wing politics in the U.S., where the simplest theories, ones which are just starting points in economics, are used as if they are the truth. For instance, many people claim that taxes discourage economic activity, and therefore we should cut taxes whenever possible. Many people also claim that regulations are bad, and therefore we should let all companies, whether they are as large as AT&T or Google, do whatever they want or merge into whatever they want. Those are just bad and incorrect uses of economic knowledge.

And secondly, the political discourse, the political affiliations, and the political ideas influence economic research and have an impact on what types of topics and in what way economists explore. Again, I think if you go back to the years or decade before the financial crisis [inaudible] Wall Street and the political sphere influenced many economists, especially financial economists, but more broadly, and that shaped their views and their research, which then got reflected back as a justification for the political actions that were taken at the time.

With respect to the first fault line you mentioned, the way in which people use incorrect or oversimplified economic arguments in their discourse, something I personally find challenging is even the very baseline parsing of what economic data is relevant. Should I be looking at job growth? Should I be looking at x, y, or z metric? In your view, what statistics should the average citizen look at to be informed?

Yeah. That’s the problem, right? Economics is dealing with very complex matters, and it’s made much more challenging and complex by the fact that you’re dealing with humans in a changing world which is transformed by social change, technological change, new ideas, new products, new sectoral compositions, and so on. So, there is no agreement among economists, even top economists in the top academic institutions, about, for example, whether employment is the right thing to look at or non-employment.

In the U.S., if you look at unemployment today, you think the labor market is doing great. If you look at the non-employment rate, which is say the working-age population and what’s the rate at which they’re working, it’s not doing that great. If you look at wage growth, it’s doing terrible. So which one do you look at? As [Benjamin Disraeli] said, “There are three kinds of lies: lies, damned lies, and statistics.” You can use statistics in whichever way you want, and the problem is more severe in economics than physics for example.

You’re not going to have an Op-Ed columnist who has never taken a physics course comment on forces of gravity, black holes, and the nature of matters. But in economics, it’s not like that. Everybody can see the data. Everybody can comment on it. And the previous dimension you raised, the political nature of economic discourse, means there are experts sometimes pushing in different directions. That makes the situation more complicated, and there’s no perfect solution to it. That being said, I think we need to make a greater effort to try and separate the charlatans from the experts, and the experts need to try and speak in a common voice, in a clear and non-partisan way, to the extent that they can on issues of agreement. It’s decidedly a work in progress. In fact, there’s this survey of a bunch of economists from the top economic institutions. It’s about 40 of us in total. The survey is run by the University of Chicago’s IGM Economic Experts Panel, and it highlights that even if you have discussions in the media, there are many topics about which economists agree, and there are also some topics about which economists disagree. The survey tries to reveal those similarities and differences in a transparent matter, and that sort of thing is a good contributor to the debate.

I’ve read a lot of stuff about how GDP as a metric has become the gold standard, and that probably ties into what you said about how it’s really easy to make kind of right-wing political arguments about free markets that are oversimplified. Do you think that’s been damaging? Do you think GDP is a relatively good metric?

In this case, I think there’s a big confusion. There are people, including the Nobel prize-winning economists Amartya Sen, who criticize GDP. But they’re criticizing the wrong thing. GDP was never meant to be a measure of welfare. GDP is a very well-defined measure. It is the value of the market activity used and marketed goods and services in the economy. There is no theory or conception that it should be a measure of welfare. It’s a very, very useful measure, and it is extremely informative when you say, as we did at the beginning, that the U.S. has become 30-40x richer whereas, for instance, Peru has not, and the Democratic Republic of Congo has actually reduced its GDP per capita over the last 50 years.

But, when you actually picture things like environmental damage, what’s happening to inequality, to health, to education, to opportunities, to the gender gap, all of these things are relevant. Nobody in their right mind would ignore these things. On the other hand, Amartya Sen’s solution is a terrible one which has unfortunately been adopted by the United Nations and other institutions. Basically, you create an index which nobody knows. Not even the people who work on it remember the formula for the index. And even if you know the index’s formula, it doesn’t mean anything because when you combine seven different factors and come up with an index that nobody understands, it’s completely opaque and self-defeating.

Instead, you know, horses for courses. You have to be clear about what you want to look at and for what purpose. If you want to understand the economic efficiency, GDP is a good place to start. If you want to understand environmental damage, look at the carbon footprint, or look at what’s going on with other pollution-related things. If you want to understand welfare, look at inequality, gender gap, opportunities, health, and so on. Those are super important. You want to have a dashboard which has many measures in it, but you don’t want to confuse them.

Last question. What do you think makes people confuse GDP as a measure of productivity with GDP as a measure of welfare? Why do people take it normatively?

I don’t know, there might be several reasons. The first reason is a good reason. Many of the things that we care about, at broad strokes, do correlate with GDP. If you, say, want to compare Nigeria to the U.S., looking at female school enrollment, life-expectancy, GDP, or poverty will all give you similar results. There are natural reasons for focusing on GDP as a first pass because the other metrics are correlated with it.

On the other hand, I think there might be a bad reason also, which is that over the last 30 to 40 years especially, or maybe a little bit longer, we have been growing as a world economy but also doing irreparable damage to the environment. Focusing solely on GDP as a badge of success, while ignoring these other damages, I think is flawed. I think the measures and the issues we talk about are all important, but I think in this current juncture, the one that I would say is most critical is the environmental damage. And that’s not an issue of GDP. It’s not that our measure of GDP is incorrect. It’s just that we really have to take into account not just how much we’re growing but also how much we’re irreparably damaging the environment, especially with our current carbon footprint.