Daron Acemoglu – Inclusive institutions, democracy and the key drivers of economic growth

Summary

In this interview, Daron Acemoglu, an Institute professor at MIT, discusses the pivotal role of institutions in fostering economic growth. He emphasizes the importance of inclusive economic institutions that provide stability and equal opportunities, and stresses the interplay between economic and political factors. Acemoglu also addresses the challenges facing democracies, including the rise of autocratic tendencies in Central Europe. Furthermore, he delves into the impact of automation on labor markets, highlighting the need for a balanced approach to technological change. His journey into economics was inspired by a desire to understand the connections between democracy, economic development, and social well-being.

Takeaways

• 🌟 Daron Acemoglu is an Institute professor at MIT, focusing on political economy and the impact of technological change on productivity, inequality, wages, and employment.
• 🏛️ Acemoglu emphasizes that good institutions, which provide stability and secure rights for individuals, are key drivers of economic growth and shared prosperity.
• 🔄 The economist argues that inclusive economic institutions are both incentive-related, encouraging investment and innovation, and opportunity-related, ensuring a level playing field for all.
• 🤝 Acemoglu points out the interdependence of economic, political, and social factors, noting that economic institutions are shaped by and cannot be separated from political ones.
• 🌍 He discusses the challenges democracies face globally and in Central Europe, highlighting the retreat of democracy since the early 2000s and the exploitation of democratic weaknesses by autocratic leaders.
• 👷‍♂️ The interview touches on the relationship between labor and technological growth, with Acemoglu noting the potential disruptions and social backlash caused by automation.
• 🛠️ Acemoglu criticizes the focus on automation over the past 20 years, suggesting it has led to a neglect of new tasks and activities that could compensate for job displacement.
• 💡 He suggests that institutions are not just designed but evolve from historical processes and political interactions, making them difficult to change simply by altering constitutional provisions.
• 🌱 Acemoglu's interest in economics was sparked by his teenage experiences in Turkey during a military dictatorship, leading him to explore the links between democracy and economic development.
• 📚 His academic journey led him to discover economic historians like Douglas North, who inspired him to pursue questions about the institutional foundations of economic development.

Q & A

What are the main areas of research focus for Daron Acemoglu?

Daron Acemoglu focuses on political economy, particularly the institutional foundations of long-run economic development, poverty, prosperity, and technological change and its impacts on productivity, inequality, wages, and employment.

How does Daron Acemoglu define good institutions in relation to economic growth?

Good institutions, according to Acemoglu, are those that create stability and secure rights for individuals to engage in economic transactions, investment, education, and legal functions. These institutions are inclusive and provide a level playing field and equal opportunities for a broad cross-section of society.

What is the relationship between economic institutions and political power according to Acemoglu?

Acemoglu emphasizes that economic institutions are shaped by political institutions and the distribution of political power in society. Economic institutions cannot remain inclusive if political institutions and structures are against inclusivity.

Why does Acemoglu argue that designing institutions is challenging?

Acemoglu points out that institutions are evolved things, resulting from historical processes, interactions between politics and norms, and people's participation in politics. They cannot be easily designed or changed by just altering the provisions of a constitution; it requires a bottom-up process and active participation.

What are the current challenges that democracies face worldwide and specifically in Central Europe?

Acemoglu notes that democracy has been in retreat globally since the early 2000s, with powerful leaders and autocratic tendencies undermining democratic structures. In Central Europe, despite economic success, the relatively new democratic experiment leaves vulnerabilities that are being exploited.

How does Acemoglu view the role of democracy in fostering economic growth and social development?

Acemoglu believes that democracy, while necessary, is not sufficient on its own. It must be accompanied by inclusive political and economic institutions to cultivate values and participations that contribute to economic growth, education, and child health.

What is Acemoglu's perspective on the impact of automation on labor markets?

Acemoglu sees automation as a double-edged sword: it improves productivity but can displace labor and generate social backlash. He argues that while automation has been a part of technological change, it has often been accompanied by the creation of new tasks and activities that have kept labor engaged and provided a stable labor share of national income.

How did Daron Acemoglu's early life experiences influence his decision to become an economist?

Acemoglu's interest in economics was sparked by his experiences growing up in Turkey during the 1980s under a military dictatorship. He was intrigued by the relationship between democracy, economic conditions, and freedom of the press, which led him to study economics to understand these issues.

What was Acemoglu's initial misconception about the field of economics and how did it change?

Acemoglu initially thought economics would directly address questions of democracy and dictatorship, but soon realized it was broader. He continued to be drawn to economics for its ability to tackle important social questions through quantitative analysis and later found a way to reconnect with his initial interests during his PhD.

How does Acemoglu describe the evolution of tasks and activities in relation to technological change?

Acemoglu describes the evolution of tasks and activities as a response to technological change, where new tasks emerge that did not exist before, often becoming central to labor's gainful employment and share of national income.

What does Acemoglu suggest is the current problem with the direction of technological change and public policy?

Acemoglu suggests that the current problem is an overemphasis on automation to reduce costs, neglecting the development of new activities where labor is central. This has led to an environment of disruption without sufficient compensatory measures, indicating a need for a change in the direction of technological change and public policy.

Outlines

00:00

🌟 Economic Growth and Institutions

In this segment, Daron Acemoglu, an Institute professor at MIT, discusses his research on political economy and the impact of institutions on economic development. He emphasizes the importance of inclusive economic institutions that provide stability and secure rights for individuals to engage in economic activities. Acemoglu explains that these institutions are crucial for technological change, productivity, and shared prosperity. He also highlights the interplay between economic and political institutions, noting that economic systems are heavily influenced by the distribution of political power. Acemoglu stresses the difficulty in designing institutions, suggesting they evolve through historical processes and political interactions, rather than being simply imposed by constitutions.

05:00

🗳️ Democracy and Its Challenges

Daron Acemoglu addresses the current state of democracy, particularly in Central Europe, and the challenges it faces. He begins by clarifying that while democracy is necessary for inclusive political and economic institutions, it is not always sufficient, as many self-proclaimed democracies lack true democratic values and participation. Acemoglu acknowledges the skepticism towards democracy but argues that it still outperforms other systems in fostering economic growth and social well-being. He notes a global retreat of democracy since the early 2000s, which he attributes to powerful leaders with autocratic tendencies. In the context of Central Europe, he points out that despite economic success, the region's relatively new democratic structures are vulnerable to exploitation by those seeking to undermine them.

10:02

🤖 Automation and Labor Markets

Acemoglu delves into the relationship between labor, technological growth, and the impact of automation on labor markets. He criticizes the lack of understanding among policymakers and researchers regarding the broader implications of automation. Acemoglu explains that while automation can improve productivity, it also displaces labor and can generate social backlash. He argues that throughout history, automation has been accompanied by the creation of new tasks and activities, which have helped maintain labor's share of national income. However, in recent years, the focus on cost reduction through automation has overshadowed the development of new labor-centric tasks, leading to a disruptive environment without adequate compensation.

🎓 Becoming an Economist

In this final segment, Acemoglu shares his personal journey into economics and academia. He recounts his early interest in understanding the relationship between democracy and economic conditions in Turkey during the 1980s. Initially drawn to economics to explore these questions, he found the field engaging and decided to pursue it further. Acemoglu's path led him to discover the works of economic historians like Douglas North, who inspired him to delve deeper into the intersection of economics and historical analysis. This eventually shaped his academic focus on the role of institutions in economic development.

Keywords

💡Institutions

Institutions refer to the established laws, rules, and practices that govern the functioning of a society or organization. In the context of the video, Daron Acemoglu emphasizes the importance of institutions in driving economic growth, particularly those that create stability and secure rights for individuals to engage in economic activities. The video discusses how 'inclusive economic institutions' can lead to technological change, productivity, and shared prosperity, as mentioned in Acemoglu's book 'Why Nations Fail?' with James Robinson.

💡Economic Growth

Economic growth is the increase in the production of goods and services by an economy over time. The video underscores the role of good institutions in fostering economic growth. Acemoglu explains that institutions that provide stability and secure rights for individuals are crucial for encouraging investment, innovation, and a level playing field, which in turn leads to economic growth and prosperity.

💡Political Economy

Political economy is the study of how political systems and public policies influence economic activities and decisions. Acemoglu's research focuses on political economy, particularly the institutional foundations of long-run economic development. The video highlights how political institutions shape economic ones, and the interplay between political power and economic outcomes.

💡Technological Change

Technological change refers to the advancements and innovations in technology that can alter the way goods and services are produced and consumed. In the video, Acemoglu discusses the impact of technological change on productivity, inequality, wages, and employment. He also touches upon the social implications of automation and how it can disrupt labor markets.

💡Inclusive Economic Institutions

Inclusive economic institutions are systems that provide equal opportunities and secure rights for a broad cross-section of society, encouraging participation in economic activities. The video explains that such institutions are essential for creating a level playing field and ensuring that economic growth is shared among all members of society, rather than being concentrated among a few.

💡Productivity

Productivity refers to the efficiency with which goods and services are produced, often measured as the output per unit of input. The video discusses how institutions that create stability and secure rights can lead to technological change and increased productivity, which is crucial for economic growth and shared prosperity.

💡Democracy

Democracy is a system of government where power is vested in the people and exercised by them directly or through elected representatives. Acemoglu stresses the importance of democracy in the video, arguing that while it is a necessary condition for inclusive political systems, it is not sufficient on its own. He notes that democracy has been in retreat globally, and this retreat poses challenges for countries, including those in Central Europe.

💡Automation

Automation is the use of technology to perform tasks that would otherwise be done by humans. The video discusses the potential threats that automation poses to labor markets, as it can replace human labor with machines, leading to job displacement. Acemoglu points out that while automation can improve productivity, it also requires a careful consideration of how it affects labor and society at large.

💡Labor Markets

Labor markets refer to the system through which labor is bought and sold, and workers are employed. In the video, Acemoglu discusses the shocks that threaten labor markets, particularly in the context of automation. He highlights the need for public policy and social norms to adapt to the changes brought about by technological advancements to ensure that labor markets remain stable and productive.

💡Political Power

Political power is the ability to influence the behavior of people or the course of events. The video emphasizes how the distribution of political power shapes economic institutions. Acemoglu argues that for economic institutions to be inclusive, there must be a corresponding inclusiveness in political institutions, which distribute power broadly and create opportunities for political participation.

Highlights

Daron Acemoglu is an Institute professor at MIT focusing on political economy and the impacts of technological change.

Institutions are key drivers of economic growth, particularly those that create stability and secure individual rights.

Inclusive economic institutions are both incentive and opportunity related, fostering investment and a level playing field.

Economic institutions are shaped by political ones, making a balance between the two crucial for inclusivity.

Designing institutions is challenging as they evolve from historical processes and political interactions.

Democracy is a necessary but not sufficient condition for cultivating values and participations in a political system.

Despite skepticism, democracy contributes positively to economic growth, education, and child health.

Democracy has been in retreat globally since the early 2000s, with Central Europe experiencing vulnerabilities.

The democratic experiment in Central Europe faces exploitation due to its relative newness and weaknesses.

Labor markets are threatened by automation, which displaces workers and generates social backlash.

Automation has been accompanied by the creation of new tasks, which has helped maintain labor's share of national income.

The focus on automation over the last 20 years has led to a disruption without compensatory activities.

Daron Acemoglu's interest in economics was sparked by Turkey's political and economic situation during his teenage years.

Acemoglu's initial misconception about economics was corrected during his PhD, where he found relevance to his initial interests.

Douglas North's work inspired Acemoglu to pursue economic history and analysis to understand societal questions.

Transcripts

We landed two days ago in Boston, USA to start our journey

of visiting the awardees of the John von Neumann and

the Herbert Simon Awards of Rajk College for Advanced Studies.

Our first interview is with Daron Acemoglu at the Economics Department of MIT.

Let us welcome you in his office!

My name is Daron Acemoglu, I'm an Institute professor at MIT

and I am an economist but the two particular areas where

I focus most in my research are political economy

in particular institutional foundations of

long-run economic development, poverty, prosperity

and technological change and its impacts on productivity,

inequality, wages and employment.

You believe that institutions are the key drivers of economic growth.

Walk us through the relationship between good institutions and growth

and tell us what makes a good institution in the first place.

Satisfactory answers to those questions would probably take several hours

or perhaps a lifetime if you really want to think deeply about them,

but essentially what my research emphasizes

are three bits that are relevant for an answer perhaps.

The first one is that there is a lot of evidence

that institutions that create stability,

secure rights for individuals to get engaged

in economic transactions, investment,

education, contracting, legal functions,

I think those are important for both technological change

and productivity,

as well as for various aspects of shared prosperity.

Those are the things that we call sort of

inclusive economic institutions in my book with

James Robinson "Why Nations Fail?", and

essentially they're both

incentive related and opportunity related.

So the secure stable environments are good for

incentives for people to undertake investments

or better themselves and find new ways of approaching

new problems or existing problems.

But at the same time it is really also important to have a

level playing field, equal opportunity

for a broad cross-section of society

because otherwise it's going to be a very unequal

and also inefficient set up.

The second important idea, is that those economic factors

cannot be separated from political and social ones.

So if you say we want to have a dictatorship where power

is concentrated in the hands of a single person

or a small group of people, but they'll just do the right thing

for the economy that just almost never works.

And the reason is because economic institutions

are shaped by political institutions

and the distribution of political power in society.

And in fact this relationship is so organic that it is almost

impossible for economic institutions to remain inclusive

when political institutions and the political structures

are very much against inclusivity.

Meaning that they do not create a broad distribution of

political power, they do not create constraints,

they do not create broader political opportunities,

political participation, social participation, social respect

and so on

And then the third one, and that's the most challenging

in some sense is that it's really hard to design institutions.

You know, when we talk of institutions one naive reading

is that those are like constitutions and if you have

wise people who design good constitutions we'll be all set.

But that's not our view of institutions. Institutions are

evolved things, they result from historical processes,

they result from the interaction between politics and

norms, they result from people participating in politics

in various different ways.

And that's why you cannot change institutions

by just changing the provisions of a constitution

and you cannot easily design institutions,

it has to be partly a bottom-up process,

but it's not just a pure evolutionary process either.

Certainly people participating in politics

with different visions, learning from more successful

cases and understanding what the implications

of different institutional choices are,

is an important part of the process.

You stress the importance of democracy many times

throughout your works. Given the current political climate,

what are the challenges that democracies around the world

and in Central Europe more specifically face?

Well, you know, this is very important. And if I may,

let me take a few minutes to answer that question.

Starting from two basic premises first,

and then I'll come back to the state of democracy today

around the world and in Central Europe.

The first is that I talked of inclusive political institutions,

inclusive economic institutions.

I didn't use the word democracy.

And the reason for that is because

democracy is a necessary but not sufficient condition

for political systems that cultivate the sort of values

and participations that I indicated.

In particular, because many regimes call themselves democratic, they do have elections, but that's not enough

because elections if they are set up in the context of clientillistic situations, non-competitive places where

you know, some personalities dominate politics and there aren't the right sort of civil society

and other constraints on politicians is not going to be enough. But democracy is a scenic one,

so you need to have some sort of democratic structure.

The second is that democracy has had a bad day in both throughout history and today.

People are very skeptical about democracy, there are many critical voices about democracy.

My own research shows that despite all of these shortcomings of many democratic regimes,

actually democracy is very good for economic growth, it's very good for education, child health, lots of things

that we associate with modern successful societies democracy contributes to it because it's much better

than the alternatives. Now, in light of that you would expect democracy to be in the ascendancy.

But the problem is that democracy has been in retreat everywhere around the world

since about the middle or early 2000s. You know at some level that might appear surprising but it's not

because the fact that democracy is good for the poor for example or for protecting

the health investments in children, you know, that doesn't necessarily imply that everybody's going to

rally around democracy. There are people who benefit from weakening of democracies and among them

are powerful leaders with autocratic tendencies, and that's essentially what has happened in Central Europe also,

which is that, you know, if you look at it in many ways countries like Poland, Czech Republic, Slovakia, Hungary

have been economically very successful since transition. Contrary to many fears, they rebounded well,

and they’ve been able to build some parts of their economy quite well. But at the same time, the democratic experiment

which started very well, also left a lot of weaknesses that are easy to exploit. If you look at the democratic structures

with the civil society participation, media, political parties in Western Europe, they have evolved over centuries.

In the context of Central Europe, you know, the democratic experiment is much new, so it leaves more vulnerabilities

and for the same reasons that I've articulated, if the autocrats or people with autocratic tendencies want to

undermine them, it has greater vulnerabilities and I think that's what we're sort of seeing in many of these countries.

You spend a considerable time on studying the relationship between labor and technological growth,

which is becoming a more and more broadly discussed topic today.

What shocks threaten the labor markets and what sort of changes will we see as a consequence of automation?

I think it’s a fascinating topic. It's fair to say that both policymakers

and academic researchers have been asleep at the wheel. In the sense that we haven't really understood

what automation entails both in terms of its productivity and work implications, but also in terms of

social implications. And again for linking it to my answer to the previous question qualitative historians sort of

understood that especially when they were writing about the factory system in its early phases the assembly line

they saw that there was going to be a lot of disruption and therefore a lot of social reactions to these things

and I think we're living through a period similar to that.

Automation is a particular type of technological change because it replaces humans by machines.

It improves productivity, but the displacement that it creates may hurt labor and also it generates a lot of social

backlash. Now, of course, if the history of technology was just one of automation, we would have much greater pains

of economic growth, we would not have a relatively stable labor share which means distribution of resources being

somewhat more fair or even though it's always unequal in many modern economies...

but labour has been getting 60-65 percent of national income in many modern economies

So that would not have been possible, if automation was the only thing.

My own research emphasizes a lot the fact that automation has often gone hand-in-hand with what we call new tasks,

new activities in which labor is central. If you look at it like in the US economy, even the same is probably true

in Hungary: the majority of the people around you will be doing tasks that did not exist one hundred years ago.

Those are the tasks that are really central for labor to be gainfully employed and for labor to receive such a large

share of national income. But what I think has happened is that over the last 20 years there has been so much focus

in the business community on automating to reduce costs that those other activities have fallen by the wayside.

And as a result, it has created an environment in which there's a lot of automation,

so there is this disruption that it creates and the things to compensate for those have been absent.

So it's a deep problem and it's a problem of direction of technological change, it is a problem of public policy

and it is a problem of social norms among business leaders.

What drove you to becoming an economist and an academic?

Well, I think everybody has a different story for that, but in my case, I became interested in these questions

when I was in my teens, you know, as I was turning 16-17, you know Turkey in the 1980s

was in the midst of a military dictatorship, the economy was in trouble, there was nothing, like a free press,

and I started thinking about – in a naive teenager sort of way – you know how we could understand that,

whether these were related, you know, if Turkey had a better democracy, what would that imply and I decided

that those were interesting enough questions and I was passionate about about them that I should study them,

and I thought – and I was wrong on that – that that's what economics was about. So I would roll to study economics

in order to tackle these questions. It took me the whole of about a month to realize that economics wasn't about that,

but it was still fun, I really liked it. I liked the way in which – you know, you could see it as an undergraduate –, that

you are dealing with important social questions and you are using quantitative, serious analysis to tackle them

and I sort of went along for the ride with economics. I got interested in many different aspects of economics

and only after starting my PhD after finishing my masters and starting my PhD at the LSE,

I realized actually, I can go back and think about some of the same questions that had motivated me to get into it

and there were some economists who were sort of trying to do the same way. For example, I discovered Douglas North

at the time, you know, an economic historian who was using economic history and economic analysis

to tackle similar questions and that was inspiring and then made me want to go in a somewhat different direction

but along the same sort of paths that I had originally embarked.