Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Daron Acemoglu (MIT Economics Prof) on Institutions, Economic Growth, and AI

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Daron Acemoglu (MIT Economics Prof) on Institutions, Economic Growth, and AI · The Capitalism and Freedom in the Twenty-First Century Podcast

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This is The Capitalism and Freedom in the Twenty-First Century Podcast where we talk
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about economics, markets and public policy. I'm Jon Hartley, your host. Today my guest is Daron
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Acemoglu, who is the institute professor of economics at the MIT Department of Economics.
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Daron, to many, needs no introduction. He is one of the most cited economists in the
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world and amongst the most influential, a leading scholar in labor economics, development economics,
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political economy, economic history and economic theory, as well as one of the most prominent
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advocates for institutions as a fundamental cause of growth and a leading voice on artificial
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intelligence and its implications for society. Daron is the author of many very popular
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bestselling books, including Why Nations Fail, The Narrow Corridor, most recently,
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Power and Progress. He was awarded the John Bates Clark Medal in 2005 among many other of the field
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of economics top prizes, and is viewed by many as a future winner of the Nobel Prize in economics.
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Today I'm going to talk with Daron about his thoughts on what sorts of institutions are the
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ultimate cause of economic growth as well as what he thinks about artificial intelligence
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among many other questions on the current state of workers, firms and political economy. Daron,
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it's such an honor to have you on. Thank you, Jon. It's my pleasure.
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Thanks for having me on your program. I want to start with your personal
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background because I feel that so, so many are intimately familiar with your academic
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work and your popular writings. Many people may not know Daron the individual that well. Daron,
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you grew up in Turkey where you went to high school. Your father was a lawyer and a university
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professor. Your mother was an elementary school principal. I read in a 2010 interview, you said
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that you spent a night in jail in Turkey because you were an unlicensed lun driver and police had
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made some arrests because of some haphazard laws. You also said that you were not able to
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go back to Turkey because you left without doing military service, but I know since you've advised
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the CHP there, which is the party in opposition to Erdogan, we could talk more about that later.
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But I'm just curious, after high school, you moved to the UK, you did your undergrad at the
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University of York and then your PhD at LSE where you were a star student under Kevin Roberts, who's
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also advised Thomas Piketty. And after spending a year as a lecturer at LSE, you've been a professor
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of economics at MIT for the past 30 years. I'm curious, at what point in your life did you say,
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"Aha, I want to be an economist and an academic." Was there a point where you said you really wanted
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to study economic growth? Did your upbringing as an Armenian and Turkey influence you in any way?
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Was there anything in graduate school at LSE or in your undergrad that was particularly formative?
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Yeah. I mean, I think you've summarized most of my bio extremely well, and indeed
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it was my experiences during my formative years in Istanbul as a high school student,
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as a minority, and perhaps as somebody who was interested in politics that made me initially
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intrigued about economics. In particular, as a teenager, I thought economics was very different
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than what I later discovered it to be. I thought it would be about big questions such as democracy,
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growth, political opposition, repression and so on. And growing up in Turkey, first in my
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early teens as a military dictatorship then as a sort of a controlled transition to democracy, but
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still under quite a bit of repression, I was quite interested in those broad questions and I decided
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I want to study economics. And I think just because of the milieu I was in with my father who
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was no longer in the university, but I remember when I was much younger during his university
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days and just the other sort of surroundings, I thought academic career was very attractive.
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It would give you intellectual freedom, it would give you the ability to sort of learn stuff, which
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appeared like an interesting very indulging career when I was a teenager, but I had no idea what
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economics was about. So I was sort of toying with the idea of, "Oh, wouldn't it be great to have an
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academic career?" But I had no idea about it. And then once I went to York to do my undergraduates,
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I got to understand what economics was about. It was at first different from what I was expecting,
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perhaps slight disappointment, but then I sort of liked what I saw. I really admired
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the effort to use quantitative reasoning to answer social questions to the extent that
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you see that in an undergraduate program, to the extent that as a very young person,
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I could appreciate it, but sort of appeal to me. And I think towards the end of my undergraduate
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years, the idea of a PhD was firmly established in my mind and the idea of an academic career
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was looking even more sort of concrete than it was when I was a high school student. But then I
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didn't want to go into that with my eyes shut. So in the summer between the end of my undergraduate
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and my master's and the first summer after my master's, I... Actually, sorry. No, the other way
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around. In the year before my last year of college and the year between undergraduate and master's,
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I did go and intern at a bank in Istanbul and I didn't like it very much. So I became even
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more determined to have an academic career. Fascinating, fascinating. And interesting
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how those experiences in high school and in undergrad can be so formative. It's amazing
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the career you had and the way which you're continuing to publish is many are in awe to
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say the least. And we can talk a little bit more about your thoughts on Turkey later, but
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I want to really get into your academic work and really first get into institutions, which I think
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you're most well known for. You're well known for many things, but I think your contributions
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to the theory and empirics of institutions I think really stand out. So like other new
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institutional school economists before you, I know schools of thought are maybe a little outdated,
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at least in your Wikipedia page it says that you're a member of the new institutional school.
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And I mean folks really like Doug North, Avner Greif, Oliver Williamson, Ronald Coase, these are
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people that studied property rights transaction costs, I think similar to much of your work.
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You argue that institutions are the fundamental cause of growth, and this
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is I think a revolutionary idea, and you really provided a lot of the empiric. Traditionally
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institutional economics was a very theoretical field before you came along and contribute all
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these wonderful empirics. As of 20 years ago, this was still a very hotly debated topic and I think
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to some degree still is now. The big question then was, was geography like Jared diamond's Guns,
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Germs and Steel, why are cold countries so rich and hot countries so poor? There was
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one hypothesis, culture was another. Sils I think looms large. I think things like
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Max Weber's Protestant work ethic arguing that Protestant countries are richer than Catholic
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countries and that there's something cultural at play there and there's many other areas of
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culture. And then the third is institutions like you argue for in your bestseller,
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Why Nations Fail with James Robinson, which is one of my favorite economics books of all time, I
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highly recommend it. If any of our listeners have not read it, you're listening to this podcast,
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I highly recommend that you go out now and buy it. Now, what do we mean by institutions? For the
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listeners out there that aren't familiar, we can think of them as arrangements like
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property rights, rule of law, government policies. To me, it's pretty obvious that
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institutions matter a lot. You look at North Korea and South Korea pre the Korean War 70 years ago,
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look at them now, enormous gap in the activity between the two countries, a great point you
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made in Why Nations Fail. Also look at the border towns across the US-Mexico border,
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another example. You gave a massive differences in income, and even though they're part of the same
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country just a couple hundred years ago. I know that occasionally there's some
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hard critics of maybe the data in your Colonial Origins paper. And I think at some level you
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look at these examples and I think it's just so, so clear on the institutions matter a lot. But
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I think we can, there's lots of others that will debate the degree to which culture and
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geography shapes and influences institutions and what came first. I think maybe that's a
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healthy debate, but there's no question that institutions are essential indispensable
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for the reasons that we've just talked about. I think a Nobel Prize winning contribution on your
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part easy. But I think the harder question now is which institutions matter and why?
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Nobel Prize winning economist Doug North define institutions as rules of the game. Now, I think
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that definition may be a little bit too broad. We have formal institutions like property rights,
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rule of law, but then there's also informal ones that some people like to talk about like trust.
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And at some level I think anything and everything becomes an institution, which kind of makes the
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definition meaningless under how some people define it. But I think your definition makes
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some progress. You have this famous taxonomy of inclusive institutions versus extractive
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institutions, and often I think you refer to more formal type of institutions. So things that
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involve government in some way often. And correct me if I'm wrong, but by inclusive you mean things
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like evenly distributed property rights, rule of law. By extractive you mean things like slavery
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during the colonial period. I fully agree with you that these are examples of institutions that have
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helped and hurt growth respectively. But I want to challenge you a little bit on this definition
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and may ventured a hope even improvement. I'm curious, and you mentioned this a little bit
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in Why Nations Fail as sort of a rival school of thought on growth, but I'm curious why not liberal
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economic institutions versus illiberal economic institutions as a fundamental cause of growth?
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Obviously without regulations and predictable, equally applied laws, markets won't work. So we
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do need some government, we do need rule of law, we need courts. But on the question of liberal
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institutions being the ultimate liberal economic institutions being the ultimate fundamental cause
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of growth, where do you think that idea goes wrong? And this is maybe an idea that was perhaps
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expanded by say The Chicago School and others to various degrees. For some strange reason, those
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folks never use the word institutions. I think the law and economics, people don't seem to see
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eye to eye with the economics institutions people, even though they're saying the same thing. But I'm
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curious what you think about that argument. So I mean, I think first of all, thanks for
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that excellent introduction. The passion about institutions actually goes back to my formative
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years. Also, in some sense, the questions that motivated me were about institutions.
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And I think at the time, of course I didn't have a very clear understanding of any of these things
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or any definition, but I think my thinking and what drew me into economics was a broad
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understanding of institutions. So the fact that there is more repression or less media freedom,
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I think those are institutional features because they're critical about how politics works and
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politics affects economics. And the inclusive extractive economic institution versus inclusive
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extractive political institutions discussion was trying to get at that. So why did we
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have to define inclusive institutions rather than just, say refer to something existed like liberal
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market institutions or something like that? And I think part of the reason is because either there
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is already very big disagreement about what liberal market institutions mean, or I think
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in that particular case, at least a dominant interpretation is something I disagree with.
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So for example, I think the simplest interpretation of the liberal economic
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or liberal capitalist or whatever you're going to call it would be deregulation is
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actually good because you're reducing the scope for the government. And I think deregulation is
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in general quite dangerous because you need the regulatory structure, infrastructure guardrails
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for what James and I call inclusive markets, markets in which the weak players cannot be
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easily taken advantage of and people have the sort of the tools for participating in market
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transactions on equal terms. So for that reason, I think the Chicago liberal line would be somewhere
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where I wouldn't want to put the line in because I think it would bundle sort of a defacto version
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of extractive institutions where organizations like corporate organizations are too powerful
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relative to both their consumers and workers. And I think that's a very, very healthy debate
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to have because it's actually an empirical debate. I don't think it's been useful to
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have this as if this is a theoretical debate. So I am second to none in my respect for Adam
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Smith. He was an amazing philosopher and his ideas were truly pathbreaking. I always
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tell people Samuelson was wrong, the famous story where he was asked by Stanislav Ulam,
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"What's a non-trivial result in economics?" And he said, "Ricardian comparative advantage."
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Well, actually I think the ultimate non-trivial result that nobody outside of economics would
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have guessed is the first welfare theorem. It's an amazing result, but it is a theoretical result,
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and it is wrong to have a discussion about American markets as if Smith answered that
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question. It's an empirical question. Smith's amazing first welfare theorem doesn't apply in the
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real world because there's monopoly power, there's informational issues, there is bargaining over key
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issues. So I think it's an empirical matter which regulations help and which regulations
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don't help. And I think X post I think is fairly clear that deregulation of finance has not been a
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fantastic idea. I think deregulation of airlines was a good idea for a while, but then by allowing
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too many mergers now we may have again swung the pendulum. So I think we need to have a much more
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case-based approach to that. And liberal versus non-liberal I think doesn't quite answer that.
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It's fascinating. I agree with you on financial regulation. It's interesting, the Chicago folks,
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the pre banking thing, which is at some level, I guess quite regulatory in the sense that the idea
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that you have to fully back banks, but the idea of having capital standards that are 100% equity
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and so forth, at some level it's quite different from the deregulatory side of things. But I fully
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agree with you that case by case is the way to go. But I guess the question becomes what are the
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exceptions to the rule and so forth? And is this- I think power. I think the main issue, and that's
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why I am very happy to be bundled with Doug North and Oliver Williamson who are inspiring figures,
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but what I view as slightly different in my emphasis from the new institutional economics
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is that for me, power is central. Whereas Oliver and Doug never really grappled enough with
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who has power in economic relations and social relations enough.
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So in some sense, the older institutional economics tradition was more sensitive to
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issues of power. And the Doug's great advance there was to bring in the neoclassical elements,
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property rights, incentives, markets and so on. But power fell by the wayside. And I think
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economics is enriched when we take power more seriously. And I think that's the place where
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we really need to think much more empirically as well as conceptually about regulation. Because I
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think one role of regulation is, and that's why representative government is key, is that the
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government has the capacity to be a very bad actor. Of course, we've seen that in history,
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but it also has the capacity in the form of representative government to bring regulations
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and laws and other practices that protect the weaker players and therefore level the playing
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field when power is such an important element. Yeah, I think that's a fascinating point. I think
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what you bring in a lot of your work to the table is new is really political economy dynamics. And I
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think this is segmented into my next question, but it's interesting to think about, well,
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you could have a very economically liberal regime, say Chile for the past 40 years,
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Chile after Pinochet. But ultimately if it ends up in some sort of high inequality state where
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people get very upset and that brings in a boric, effectively ushers in a socialist government,
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it's not really a stable long run equilibrium. It's not, but I think it's even deeper than
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that because the example that you give I think is, I don't disagree with it. If you
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overemphasize a particular aspect, you're going to have a backlash. But there is a deeper point,
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which is that unregulated markets themselves dig their own graves, not just because of the
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backlash, but because they are often going to create such power inequalities that they
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will have none of the aspects that we normally associate with markets. Nothing that Adam Smith,
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who was a very, very deep thinker, of course very, very aware of these inequities and
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imbalances, he would not have recognized that. And I think the best example of that is actually
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Russia. Russia, after the Yeltsin reforms for a couple of years, try to be a very free market.
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Of course, we can talk about the details and there were many aspects that weren't true,
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but wherever they actually try to apply with some support from experts from the economics
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community as well, those free market principles, they created incredible inequalities and they
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created the beginning of the oligarchs and they created the beginning of the, so the rent-based
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economy that then Putin has so perfected. So I think that's an even more telling example
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than Pinochet's Chile about the immediate dangers. That's fascinating. So here's my, I guess next big
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question, and that's, is an inclusive institution like democracy really causing growth? You've
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written a lot on this. You have most recently your JPE paper democracy does cause growth,
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uses Freedom House quality for data as a measure for democracy. And you find that
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after a good number of years, in fact, decades after countries democratize or improved their
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Freedom House pol [inaudible 00:22:58] for scores, that there's greater economic growth in
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those countries compared to those that don't. But I'm curious just to challenge you a little bit. I
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mean there's some people that argue, "Well, there's an endogenous thing going on there
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and changes in democracy aren't truly exogenous. You need growth first to get the democratization,
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which may cause further the growth." But I'm just like, is it possible that democracy
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doesn't perhaps cause as much growth, but maybe- Of course it's possible. Of course it's possible.
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Look, I've been interested in democracy for more than 30 years. And in fact, some of my
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first papers on political economy were exactly on democracy and the power dynamics and democracy
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dynamics. And for a long time, actually for the first 10, 12 years of my interest on democracy,
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I never looked at the relationship between democracy and economic growth. And part of the
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reason was because I read the literature and the literature said, "No, there is no relationship."
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And I said, "Fine. Okay, I'll take that." And I didn't think that was crazy, and I didn't think
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that was crazy because I can see why the process of democratization is going to create a lot of
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tensions that could be distortionary. And democracy itself is not
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a economic system that's in any way optimized for generating economic growth. Democracy is going to,
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if it functions, it's going to create forces towards redistribution, and that redistribution
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may sometimes not be good for growth, sometimes may be good for growth. Democracy is going to
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create new pathways for conflict over resources, and that may not be great either. So I always
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believed that democracy was necessary for long run systems that are stable and representative
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and accountable, but I thought, well, it may or may not be good for economic growth.
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Then when I finally started looking at the data, the evidence was so clear and overwhelming that
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democracies actually do better economically, not because they're a perfect system, but the
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alternative is already so bad. And you see that in historical data and you see that in post-war
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data. And I think in all of these cases, of course reality is more complicated and I think there is
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a question as to whether whatever we learn from the six decades that followed World War II would
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translate to what's going to happen in the 21st century. I'm completely open to the hypothesis
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that in the 21st century things that are going to be in different, but then we
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should understand how different they're going to be and we should have the evidence for it.
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But the following seems to be very clear, which is that democracies are redistributing more,
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they tax more, and they invest more in health and education, and somewhat weaker, but they're also
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better at dealing with monopolies and regulations and so on. So if you believe the IMF numbers,
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for example, on market opening, democratization is associated with market opening. So it shouldn't be
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like a complete shock to economists that in the medium run in the 10 to 20 year horizon,
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which is where we find our effects, democracies are associated with faster growth.
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Fascinating. I guess is it possible that could really just be that what comes hand in hand with
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democratic gains or things like property rights guaranteed by the courts and maybe somewhat more
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free market economically, both policies, I mean that could include antitrust, anti-monopoly sorts
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of things. I'm curious too, there are some other papers that are, I guess a bit opposed to some
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of your findings. There's this more recent Max Miller paper that looks at stock market declines
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after democratization, and maybe the stock market expects some redistribution things happening-
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No, but I like the Max Miller stuff a lot and I find it extremely consistent. And
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my interpretation is that, again, with in line with the facts that we find, democracies are not
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classically libertarian and they're not classically anti libertarian. So they do,
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that's why I mentioned the IMF measure of market openness. They further that, but then
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on the other hand, they do much more in terms of taxation and redistribution. I think that's
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part of the reason why Max's very nice results, I think are higher quality than ours because he's
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using more detailed data than the cross country cross region data that we exploit is following
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from that. They invest much more in protecting poor communities like especially in healthcare.
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So it's a mixture of things that democracy does, but it's the kind of thing that you would expect
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democracy to do. And very importantly, I'm not saying democracy always works. That's what you
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expect it to do. Sometimes it does, sometimes it doesn't. But if it does what you expect it to do,
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it should redistribute more. It should invest more in education,
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it should invest more in healthcare, and it shouldn't be so good for monopolies.
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And so I'm curious, to push you a little bit further, there's been a lot of work by Andrei
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Shleifer and co-authors on, for example, the doing business index, which is kind of
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the famous, he's doing business index very well correlated with GDP per capita across countries.
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I'm curious what you think about that, but also curious what you think about the point
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that Andrei is made with Ed Glaeser, which is what about the East Asian Tigers? Look at Hong Kong,
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Singapore, South Korea, Taiwan, they all grew to having GDP per capita by the end of the 20th
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century to be on par with western countries of the United States almost. But then this was by
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the 1990s, all under non-democratic regimes. I'm curious what you think about these examples. Are
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these instances of maybe benevolent free market dictators like Lee Kuan Yew, are they more of an
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exception rather than norm? I'm curious. Yeah, I would say they are exceptional
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in the sense that these have emerged under circumstances that are very interesting and
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we need to understand the details. And they are not inconsistent with what I'm saying. In fact,
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in the Journal of Political Economy paper, democracy does cause economic growth. I think
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at the end, in the published version, this is shortened a lot, but one of the leading
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examples is South Korea because South Korea is a, A, great example of an economy that has done much
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better after democratization. Economic growth is significantly faster, both in terms of rate of
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growth and quality of growth. And secondly, it's very challenging to the view that these societies
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somehow get rich and then democracy comes as a luxury. So from the beginning, the dictatorship
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was contested in South Korea, and the democracy movement was a very prolonged conflictual movement
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that finally won with some support from the US in a changing geopolitical environment.
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So I think the South Korean example is very interesting, but from the beginning also,
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I think both South Korea and Taiwan are very difficult to understand if you don't put them
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in the broader geopolitical context. So South Korean leaders from the beginning were very
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aware that they had to show that South Korea was doing economically better than North Korea. So
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growth promotion had to be a priority for Syngman Rhee and for General Park, just for their survival
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reasons. Similarly, Kuomintang had to show Taiwan was doing better than China. So these
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weren't unconstrained autocrats, that they were very constrained autocrats, and in particular,
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the area of a contestation was very much economic. Some people, in terms of thinking about
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mechanisms, it's totally possible that democracies really protecting us from the economically
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illiberal tendencies of non-democratic regimes, which I think are quite common that the-
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Again, I think I completely agree, they are protecting us. Again, economically liberal
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versus illiberal may not be the right label because I think we need to be clear what we
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mean by that. So I think if you draw the line at economic liberal versus illiberal at Milei
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in Argentina, no, I don't think that's right. Most democratic regimes are far to the left
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of Milei. But they are protecting us against the worst kind of oligarch causation of the economy.
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Fascinating. And just to get into Milei here, I'm curious, Andrei Shleifer published a paper for the
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Journal of Economic Literature a little while ago titled The Age of Milton Friedman,
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and I'm curious what you think about the era of market reforms in the late 20th
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century and their impact on GDP growth. I haven't read that paper, so I can't
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comment on the paper, but I'm happy to share my views of what the effects of Milton Friedman.
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Yeah, it's just a literature review. I mean, there's nothing,
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I think particularly new in the paper. I guess I just like the title of the paper, which is,
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and the point is it's just meant to describe, there was this era in the late 20th century,
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which there was all these historical examples that we have of big market reforms or shock therapy as
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some people like to controversially call it. Think post USSR, Eastern Europe, think East versus West
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Germany, Eastern Germany, Eastern Europe growing after USSR, Deng Xiaoping, China market reforms
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in the 1980s, India under the rail reforms of the 1990s, Chile after Pinochet, think Javier Milei,
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you mentioned in what he's currently attempting to do now in Argentina, trying to transition it
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away from, I'd say a relatively state influenced economy to a more market oriented one. I mean,
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these examples, sure, they may have led to more inequality and political instability
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in the long run, but they almost certainly have led to more growth. No, I mean, I don't think-
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I think this is something I also, Simon Johnson and I mentioned in our book Power and Progress
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as well, that I think it would be for us as both as economists, as people in the US market system,
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market ecosystem, it would be hubristic for us to claim victory for the market
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by comparing the US to Soviet Union or Mao to Deng Xiaoping. Absolutely no question.
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The Soviet system was bad for economic growth. Mao was horrible for economic growth. Communism
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is really bad for economic growth incentives, absolutely. But I think that comparison doesn't
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tell us much about the role of regulations, whether the Swedish system is better than the
35:48
British system or whether the New Deal regulatory system is better than the deregulation that
35:57
followed the '70s and especially post Reagan era. I think that, again, just like the discussion that
36:05
we had at the beginning has to be based on a case-based one. And I think in terms of Milton
36:11
Friedman, I think that's my basic objection to, well, I have two big objections to Milton Friedman
36:18
thought, completely recognizing that he's a brilliant, brilliant economist and with some very,
36:24
very important contributions, and he was a master of price theory. So all of those are
36:30
great. But Milton Friedman frames the question as if there is a clear answer implied by the
36:39
first welfare theorem or the Adam Smith's invisible hand, and I disagree with that.
36:46
I think it's the case base one, and it's very clear, it's open and shut as far as I'm concerned
37:01
that the Soviet system was much worse for economic growth than what the West had or what the United
37:08
States has but not because of Adam Smith's first welfare theorem. In the US, even in the best of
37:15
times, we are not near the first welfare theorem. And once you are in the second best world,
37:21
there is no theorem in economics that says a little bit of market is better than central
37:25
planning. It's really need to look at how central planning is done, et cetera. But I think history,
37:32
empirical evidence are very clear. Central planning has never worked. And so of course the
37:38
US was economically more successful and was bound to become even more so than the Soviet Union. But
37:45
that again, doesn't tell us about Sweden versus the US. So I think that's where we have to use
37:52
case-based decision, case-based analysis. Now the second problem I have with Milton
37:58
Friedman I think is his influence through the responsibility of business is the only
38:05
social responsibility of business is profits. I think that's actually a deeper problem I have
38:12
with Milton Friedman because I believe that that really pushes us in the wrong direction.
38:19
I'm an economist, I love markets. I think the market system has amazing properties,
38:25
and I believe there are forces along the invisible hand. But just like Adam Smith, Adam Smith never
38:30
believed that people being purely selfish was a good foundation for a community, nor was it
38:40
a descriptive way of understanding the world. And I think Friedman pushed business executives
38:48
to be excessively focused on shareholders and especially short-term shareholders at
38:57
the expense of more positively cooperative ways of forging relations between workers
39:06
and capital. That would've been much better and that was much better when it functioned.
39:13
It's fascinating. I mean it's interesting there's been on the shareholder, or sorry,
39:19
the profit maximization point, I guess there's sort of been some rethinking here.
39:23
And I personally agree too that it's gotten me a little bit too far, but in the sense that I think
39:28
the shareholder maximization view rather than the profit maximization view is quite different
39:34
in the sense that the nonprofit board, you're not necessarily trying to make profits that some do,
39:42
but you're really trying to maximize on the mission, which is kind of guaranteed by the
39:48
shareholders of the board members of a nonprofit. I think there's less hardcore visions of that.
39:55
But I think too, the other point is just that often shareholders in that sense are often very
40:02
much aligned with it's in their interest to maximize on the customer experience and those
40:09
of other stakeholders. So I don't think that shareholder maximization [inaudible 00:40:15]-
40:14
I think the shareholder maximization and the customer side is very interesting because if you
40:22
go after short-term shareholder value, then you would really do badly. If you go after long-term
40:29
shareholder value, then you might do better. But it's still just emphasizing shareholders really
40:37
sours the relationship between labor and capital. And I think that's very important because we need
40:42
more cooperative relations between labor and capital in all market systems, in all societies.
40:47
And I think the natural tendency of many, not all, but many business executives would be my company
40:54
is suddenly doing much better. We're making 20% more profits. I'll give you a little bit
40:58
of a raise to my workers as well. They're part of the community here. They're part of the identity
41:04
of the organization. It would be heartless, it would be a counterproductive to say, "No, no, your
41:11
outside options haven't increased, so therefore I'm going to take all of this money myself and
41:15
I'm going to give it to a few shareholders but no crumbs to you." But I think the shareholder value
41:21
revolution essentially pushed many executives either to do that or to rationalize doing that.
41:27
Fascinating. Any thoughts just on Sweden versus say US example? Curious if you have
41:35
any thoughts on the World Bank doing business index, and this is originally slide for Simeon
41:39
Djankov and much [inaudible 00:41:40]. I guess when we talk about regulation,
41:43
I don't mean financial regulation and just even simple labor market kind of regulation, and even
41:49
let's sort of push away taxes for a second. I think just how easy is it to do business? And
41:54
Sweden scores pretty well, even though it's well known for being very redistributive type society,
42:02
Scandinavian countries, they still have pretty liberal labor markets. And I think that's an
42:12
interesting and important distinction to make and maybe something that makes a lot
42:16
of western democracies particularly unique is that a lot of their economies, maybe some
42:21
exceptions like France and a few others, they may have somewhat progressive taxation, but in
42:27
general they have pretty liberal labor markets. I'm curious if you have any thoughts on that.
42:32
Well, I mean, I don't know what you mean by liberal labor markets and-
42:35
Ease of doing business. Things like 40-hour work week, not great,
42:41
or just not a business, that kind of thing. So I think the business stuff came out of
42:47
DeSoto's very important work. And obviously DeSoto was starting from the Peruvian context,
42:53
for example, where there were insane restrictions on opening new businesses and things like that.
43:00
And obviously that's horrible. The question again is this, how do you deal with regulations when you
43:09
regulate the safety of, say pharmaceuticals, or when you introduce new regulations or additional
43:18
regulations that cars have to meet? How do we think about that? And I think that's a complex
43:25
issue. And again, I would say the best way is to be case by case. I don't think there is
43:32
much reason for having onerous licensing requirements for hairdressers, but yes,
43:41
you need more licensing for pharmacists and you need more licensing for doctors and surgeons. And
43:47
I think that's those you have to navigate. But very importantly, I think Sweden is very good on
43:54
those dimensions, but to a Chicago economist, their labor markets would be very illiberal.
44:02
Collective bargaining plays a very important role. There are industry level bargains, a lot of wage
44:08
compression is a corporatist model. It's not just industry level unions and firms, but it's business
44:19
associations and government that are part of the bargaining process. But it's done quite well
44:27
in some dimensions. Now, I've also emphasized that we can't all be like Sweden because there
44:35
are advantages that Sweden gets from being a small open economy in a very innovative world,
44:43
but it has managed to be very innovative and redistribute. But it's also not just fiscal
44:48
redistribution. It's not like let the market rip and then apply Diamond Merle's type reasoning.
44:54
Actually, they have distorted all sorts of prices and especially in the labor market,
45:00
and that's actually served them well. It's a fascinating point, I think. Totally
45:05
a fair point on thinking about things on case by case basis. I want to just transition to AI and
45:14
directed technical changes, the focus of a lot of your recent work, in particular, your most recent
45:21
book, Power and Progress, which coauthored with Simon Johnson, where you argue that
45:27
the gains of innovation have not been distributed broadly in history without some sort of political,
45:35
economic and social struggle against the elite. And you also argue that automation or automated
45:42
technologies are somewhat different than other technologies, and that there's a real risk of
45:47
having unevenly distributed negative labor market consequences when technologies like say generative
45:55
AI are substitutes instead of compliments to human labor. I'm curious, what do you recommend
46:02
we do to make generative AI more complimentary towards humans? I know you've also spoken a bit
46:11
in the book about potential for regulation. I'm curious, should we be doing anything right now
46:19
in your mind today policy-wise in your mind? Thanks for bringing it to that topic. I think
46:25
a good segue to that is actually built on what we were just talking about in terms of Sweden power,
46:31
et cetera. And yes, I think there are some forces in the market system that create trickle down,
46:41
but they're not unconditional and they're not always very powerful. And I think one way of
46:47
understanding that is actually look at early 19th century factories. Early 19th century factories
46:57
are a perfect specimen of why we should really worry about power. Workers were powerless
47:06
against large employers because they did not have great employment opportunities outside
47:11
of it. The conditions in the factory were very harsh, repressive, and they couldn't
47:21
even ask for better conditions because any type of arrangement that smelled of collective bargaining
47:31
was very heavily prosecuted. They didn't even have options for improving their lot by say,
47:39
looking for another job because those were discouraged sometimes by law, sometimes by norms,
47:44
sometimes by the power of employers. So that's the sense in which I think
47:50
you have to put Sweden in a historical context and you have to put power into
47:54
the story that a more shared prosperity model in the UK I don't think would've been easy or
48:01
feasible at all without the trade union movement emerging. But it's also not just the trade unions,
48:07
because if you look at the other aspect of the early factories, you see that when the
48:14
emphasis was on automation, meaning substituting machinery for things that especially qualified
48:21
workers used to do, that often doesn't have great implications for labor. So for instance,
48:31
if you look at the most dynamic sector of the British Industrial Revolution textiles, weavers,
48:38
which was one of the jobs that was automated in the early 19th century, they experienced almost
48:48
a drop to their wages to almost one third of the level that they were before automation.
48:55
So what's going on is that when automation is so rapid and there isn't anything counterbalancing
49:01
it, then the opportunities for laborers is actually declining and making shared prosperity
49:07
much harder. So what could counterbalance automation, I don't think it's just a question
49:13
of unions asking higher wages. It really needs to be counterbalanced by something technological,
49:18
and that has to be creating new tasks, new competencies. And when you look in the second
49:22
stage of the industrial revolution, you see that wages start increasing because workers
49:27
are doing new things. Technology is enabling them to do new things, and the market system
49:32
is reallocating them to the new things, but embedded in better bargaining, so the trade
49:38
unions, and embedded in better technologies. So that is the historical precedent to my
49:44
concerns about AI, that if we use AI too much for just automation, it's not going to be conducive to
49:52
shared prosperity. Then the question becomes why do you think, why do I think that AI is likely to
50:02
be used for more automation and nothing else? And I would say A, recent history, that's how we've
50:09
used digital technologies. B, the business models of big companies that I think many big companies,
50:15
tech companies, have now developed a business model where they make money either from selling
50:22
tools for automation to other corporations or monetizing data like digital ads. And none of that
50:28
is very conducive to generating new tasks that's going to share broad prosperity. And then C-
50:33
How bout the digital ads tax is one [inaudible 00:50:35]-
50:35
Yeah, that's one of the many policies that we can think about and I support. And then C, but that's
50:43
actually a very important thing. In economics, we think innovators and business executives are going
50:53
to do a profit maximizing thing, and there are good reasons for them to do so, but the ideology
51:00
matters too. What you believe is the more likely, more exciting thing. And I think in the AI and
51:05
tech field now AGI and building more and more capable and more and more human-like machines
51:14
have become a fad. And that's I think pushing the industry more and more in the automation
51:19
direction. And that's where, and if you want to understand where the policy suggestions that I
51:24
make in the context of AI come from, I think that's the context for me. And digital ad tax
51:29
fits into that why we may need an agency, federal agency that supports more pro-human pro
51:35
worker directions of AI as think is going to be important, tax reform may be important for those.
51:40
But the most important idea that I try to articulate in my talks and in the book is
51:47
that it is technically feasible and socially desirable to have a direction for these AI
51:53
technologies that's more pro worker, that's more complimentary to workers.
51:58
So firm size is I think a thing that's certainly something that's I think on your mind broadly.
52:06
I'm going to just ask, I guess because we only have a few minutes left, just going to light you
52:11
around just a few questions. And I'm just curious, just I think you have some interesting thoughts
52:20
on this. One, firm size broadly an issue? Yes, I think so. I absolutely think so because
52:28
again, it's because of power. So if we lived in a world without power issues, I would worry about
52:34
firm size because of monopoly reasons. But that's, I think is secondary. We can worry about markups,
52:40
how large are markups? Is the markup versus product offerings, trade-offs, et cetera, or
52:47
we can be Schumpeterian and to say we need large firms for innovation. But I think once you have
52:53
power issues, it really becomes a problem. And you see that in the tech sector. 25 years ago, the
53:00
tech sector was most notable in its absence from Washington lobbying. Today, they are the biggest
53:07
lobbyists humanity has ever seen. Why? Because they're so big. Once you're so big, you're so
53:12
powerful, you have so much money, it's inevitable that you start setting the agenda in every domain.
53:17
And very successful too. Very successful.
53:19
For all these years of all these discussions about section 230 and-
53:23
Absolutely. ... all these issues,
53:25
there's been no tech regulations so far. Okay. Second question. Legal origins versus
53:32
colonial origins. Any thoughts? Obviously- Of course, colonial origins. Well, I mean I
53:38
think legal origins are important. I wouldn't deny that, but you can see so much variety within the
53:47
British Empire or within the French Empire. French law is used very differently in French colonies,
53:52
different French colonies. English law is used very differently in different English colonies.
53:56
So I think in general, and we didn't get to talk about much about culture,
54:03
same thing with legal and culture. I am very open to these issues. I think they're very important,
54:09
very interesting. Norms are super important. But where I depart from the standard emphasis
54:14
of culture, for example, is that culture is very malleable. And the same thing, once you take
54:20
power into account, what legal rules mean and how they're implemented is going to be very different.
54:28
Great. And then my last question for you is I want to just talk to you about the diverging growth in
54:33
advanced economies since 2010. You look at GDP per capita amongst advanced economies, the US is the
54:41
really only country that seems to keep growing in per capita terms since the Great Recession. And we
54:46
can do PPP and things look a little bit different, but other countries seem to be slowing down,
54:52
other advanced economies, UK, Canada, much Western Europe, Japan. Is this divergence a meaningful
54:58
thing in your mind? [inaudible 00:55:01]. It is a meaningful thing. It is a meaningful
55:02
thing, but I would say A, it's very meaningful and it's very clear, completely 100%. But if
55:10
you go before the financial crisis, it's very unclear. So the US wasn't doing better. In fact
55:17
was growing more slowly than France and Germany. Since 1980 overall, US is not the fastest grower
55:28
among the Western club. So it's not something that's like fixed characteristics of the US.
55:35
Now, it may well be that tech boom has contributed to that, but I think there are other factors that
55:43
we have to bear in mind. One is that the US actually dealt more comprehensively with the
55:52
two big crises of the last 15 years, the financial crisis and the COVID crisis. But
56:01
the financial crisis, I think the US did clean up its banking system more than European countries,
56:09
and it did not create an austerity environment like the UK. To some degree Germany did. And
56:15
after the COVID, they really, perhaps even overdid the spending, but they certainly did
56:22
not underdo it. And I think those probably are important, but we await more systematic
56:28
evidence of the role of financial things, role of technological adaptation versus the role of
56:34
austerity versus fiscal spending on this. Maybe demographics or institutions-
56:39
Demographics too. Yes, of course. Yes, yes. Well, Daron, I really want to thank you for
56:44
coming on. Such a fascinating conversation. I look forward to waking up one morning and seeing the
56:50
Nobel Committee announcing you as their laureate for that year. It's a huge honor to have you on
56:56
and want to thank you so much for this amazing conversation.
56:59
Thank you very much for inviting me and for these excellent questions and excellent conversation,
57:03
Jon. Very nice to be on the program. Thanks so much, Daron. Today our guest was
57:08
Daron Acemoglu, who is the institute professor of economics at the MIT Department of Economics. This
57:15
is the Capitalism and Freedom in the Twenty-First Century Podcast where we talk about economics,
57:20
markets and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.