Daron Acemoglu (MIT Economics Prof) on Institutions, Economic Growth, and AI

Jon Hartley:

This is The Capitalism and Freedom in the Twenty-First Century Podcast where we talk about economics, markets and public policy. I'm Jon Hartley, your host. Today my guest is Daron Acemoglu, who is the institute professor of economics at the MIT Department of Economics. Daron, to many, needs no introduction. He is one of the most cited economists in the world and amongst the most influential, a leading scholar in labor economics, development economics, political economy, economic history and economic theory, as well as one of the most prominent advocates for institutions as a fundamental cause of growth and a leading voice on artificial intelligence and its implications for society.

Daron is the author of many very popular bestselling books, including Why Nations Fail, The Narrow Corridor, most recently, Power and Progress. He was awarded the John Bates Clark Medal in 2005 among many other of the field of economics top prizes, and is viewed by many as a future winner of the Nobel Prize in economics. Today I'm going to talk with Daron about his thoughts on what sorts of institutions are the ultimate cause of economic growth as well as what he thinks about artificial intelligence among many other questions on the current state of workers, firms and political economy. Daron, it's such an honor to have you on.

Daron Acemoglu:

Thank you, Jon. It's my pleasure. Thanks for having me on your program.

Jon Hartley:

I want to start with your personal background because I feel that so, so many are intimately familiar with your academic work and your popular writings. Many people may not know Daron the individual that well. Daron, you grew up in Turkey where you went to high school. Your father was a lawyer and a university professor. Your mother was an elementary school principal. I read in a 2010 interview, you said that you spent a night in jail in Turkey because you were an unlicensed lun driver and police had made some arrests because of some haphazard laws. You also said that you were not able to go back to Turkey because you left without doing military service, but I know since you've advised the CHP there, which is the party in opposition to Erdogan, we could talk more about that later.

But I'm just curious, after high school, you moved to the UK, you did your undergrad at the University of York and then your PhD at LSE where you were a star student under Kevin Roberts, who's also advised Thomas Piketty. And after spending a year as a lecturer at LSE, you've been a professor of economics at MIT for the past 30 years. I'm curious, at what point in your life did you say, "Aha, I want to be an economist and an academic." Was there a point where you said you really wanted to study economic growth? Did your upbringing as an Armenian and Turkey influence you in any way? Was there anything in graduate school at LSE or in your undergrad that was particularly formative?

Daron Acemoglu:

Yeah. I mean, I think you've summarized most of my bio extremely well, and indeed it was my experiences during my formative years in Istanbul as a high school student, as a minority, and perhaps as somebody who was interested in politics that made me initially intrigued about economics. In particular, as a teenager, I thought economics was very different than what I later discovered it to be. I thought it would be about big questions such as democracy, growth, political opposition, repression and so on. And growing up in Turkey, first in my early teens as a military dictatorship then as a sort of a controlled transition to democracy, but still under quite a bit of repression, I was quite interested in those broad questions and I decided I want to study economics. And I think just because of the milieu I was in with my father who was no longer in the university, but I remember when I was much younger during his university days and just the other sort of surroundings, I thought academic career was very attractive.

It would give you intellectual freedom, it would give you the ability to sort of learn stuff, which appeared like an interesting very indulging career when I was a teenager, but I had no idea what economics was about. So I was sort of toying with the idea of, "Oh, wouldn't it be great to have an academic career?" But I had no idea about it. And then once I went to York to do my undergraduates, I got to understand what economics was about. It was at first different from what I was expecting, perhaps slight disappointment, but then I sort of liked what I saw. I really admired the effort to use quantitative reasoning to answer social questions to the extent that you see that in an undergraduate program, to the extent that as a very young person, I could appreciate it, but sort of appeal to me.

And I think towards the end of my undergraduate years, the idea of a PhD was firmly established in my mind and the idea of an academic career was looking even more sort of concrete than it was when I was a high school student. But then I didn't want to go into that with my eyes shut. So in the summer between the end of my undergraduate and my master's and the first summer after my master's, I... Actually, sorry. No, the other way around. In the year before my last year of college and the year between undergraduate and master's, I did go and intern at a bank in Istanbul and I didn't like it very much. So I became even more determined to have an academic career.

Jon Hartley:

Fascinating, fascinating. And interesting how those experiences in high school and in undergrad can be so formative. It's amazing the career you had and the way which you're continuing to publish is many are in awe to say the least. And we can talk a little bit more about your thoughts on Turkey later, but I want to really get into your academic work and really first get into institutions, which I think you're most well known for. You're well known for many things, but I think your contributions to the theory and empirics of institutions I think really stand out. So like other new institutional school economists before you, I know schools of thought are maybe a little outdated, at least in your Wikipedia page it says that you're a member of the new institutional school. And I mean folks really like Doug North, Avner Greif, Oliver Williamson, Ronald Coase, these are people that studied property rights transaction costs, I think similar to much of your work.

You argue that institutions are the fundamental cause of growth, and this is I think a revolutionary idea, and you really provided a lot of the empiric. Traditionally institutional economics was a very theoretical field before you came along and contribute all these wonderful empirics. As of 20 years ago, this was still a very hotly debated topic and I think to some degree still is now. The big question then was, was geography like Jared diamond's Guns, Germs and Steel, why are cold countries so rich and hot countries so poor? There was one hypothesis, culture was another. Sils I think looms large. I think things like Max Weber's Protestant work ethic arguing that Protestant countries are richer than Catholic countries and that there's something cultural at play there and there's many other areas of culture. And then the third is institutions like you argue for in your bestseller, Why Nations Fail with James Robinson, which is one of my favorite economics books of all time, I highly recommend it. If any of our listeners have not read it, you're listening to this podcast, I highly recommend that you go out now and buy it.

Now, what do we mean by institutions? For the listeners out there that aren't familiar, we can think of them as arrangements like property rights, rule of law, government policies. To me, it's pretty obvious that institutions matter a lot. You look at North Korea and South Korea pre the Korean War 70 years ago, look at them now, enormous gap in the activity between the two countries, a great point you made in Why Nations Fail. Also look at the border towns across the US-Mexico border, another example. You gave a massive differences in income, and even though they're part of the same country just a couple hundred years ago.

I know that occasionally there's some hard critics of maybe the data in your Colonial Origins paper. And I think at some level you look at these examples and I think it's just so, so clear on the institutions matter a lot. But I think we can, there's lots of others that will debate the degree to which culture and geography shapes and influences institutions and what came first. I think maybe that's a healthy debate, but there's no question that institutions are essential indispensable for the reasons that we've just talked about. I think a Nobel Prize winning contribution on your part easy. But I think the harder question now is which institutions matter and why? Nobel Prize winning economist Doug North define institutions as rules of the game. Now, I think that definition may be a little bit too broad. We have formal institutions like property rights, rule of law, but then there's also informal ones that some people like to talk about like trust.

And at some level I think anything and everything becomes an institution, which kind of makes the definition meaningless under how some people define it. But I think your definition makes some progress. You have this famous taxonomy of inclusive institutions versus extractive institutions, and often I think you refer to more formal type of institutions. So things that involve government in some way often. And correct me if I'm wrong, but by inclusive you mean things like evenly distributed property rights, rule of law. By extractive you mean things like slavery during the colonial period. I fully agree with you that these are examples of institutions that have helped and hurt growth respectively. But I want to challenge you a little bit on this definition and may ventured a hope even improvement. I'm curious, and you mentioned this a little bit in Why Nations Fail as sort of a rival school of thought on growth, but I'm curious why not liberal economic institutions versus illiberal economic institutions as a fundamental cause of growth?

Obviously without regulations and predictable, equally applied laws, markets won't work. So we do need some government, we do need rule of law, we need courts. But on the question of liberal institutions being the ultimate liberal economic institutions being the ultimate fundamental cause of growth, where do you think that idea goes wrong? And this is maybe an idea that was perhaps expanded by say The Chicago School and others to various degrees. For some strange reason, those folks never use the word institutions. I think the law and economics, people don't seem to see eye to eye with the economics institutions people, even though they're saying the same thing. But I'm curious what you think about that argument.

Daron Acemoglu:

So I mean, I think first of all, thanks for that excellent introduction. The passion about institutions actually goes back to my formative years. Also, in some sense, the questions that motivated me were about institutions. And I think at the time, of course I didn't have a very clear understanding of any of these things or any definition, but I think my thinking and what drew me into economics was a broad understanding of institutions. So the fact that there is more repression or less media freedom, I think those are institutional features because they're critical about how politics works and politics affects economics. And the inclusive extractive economic institution versus inclusive extractive political institutions discussion was trying to get at that. So why did we have to define inclusive institutions rather than just, say refer to something existed like liberal market institutions or something like that? And I think part of the reason is because either there is already very big disagreement about what liberal market institutions mean, or I think in that particular case, at least a dominant interpretation is something I disagree with.

So for example, I think the simplest interpretation of the liberal economic or liberal capitalist or whatever you're going to call it would be deregulation is actually good because you're reducing the scope for the government. And I think deregulation is in general quite dangerous because you need the regulatory structure, infrastructure guardrails for what James and I call inclusive markets, markets in which the weak players cannot be easily taken advantage of and people have the sort of the tools for participating in market transactions on equal terms. So for that reason, I think the Chicago liberal line would be somewhere where I wouldn't want to put the line in because I think it would bundle sort of a defacto version of extractive institutions where organizations like corporate organizations are too powerful relative to both their consumers and workers. And I think that's a very, very healthy debate to have because it's actually an empirical debate. I don't think it's been useful to have this as if this is a theoretical debate.

So I am second to none in my respect for Adam Smith. He was an amazing philosopher and his ideas were truly pathbreaking. I always tell people Samuelson was wrong, the famous story where he was asked by Stanislav Ulam, "What's a non-trivial result in economics?" And he said, "Ricardian comparative advantage."

Well, actually I think the ultimate non-trivial result that nobody outside of economics would have guessed is the first welfare theorem. It's an amazing result, but it is a theoretical result, and it is wrong to have a discussion about American markets as if Smith answered that question. It's an empirical question. Smith's amazing first welfare theorem doesn't apply in the real world because there's monopoly power, there's informational issues, there is bargaining over key issues. So I think it's an empirical matter which regulations help and which regulations don't help. And I think X post I think is fairly clear that deregulation of finance has not been a fantastic idea. I think deregulation of airlines was a good idea for a while, but then by allowing too many mergers now we may have again swung the pendulum. So I think we need to have a much more case-based approach to that. And liberal versus non-liberal I think doesn't quite answer that.

Jon Hartley:

It's fascinating. I agree with you on financial regulation. It's interesting, the Chicago folks, the pre banking thing, which is at some level, I guess quite regulatory in the sense that the idea that you have to fully back banks, but the idea of having capital standards that are 100% equity and so forth, at some level it's quite different from the deregulatory side of things. But I fully agree with you that case by case is the way to go. But I guess the question becomes what are the exceptions to the rule and so forth? And is this-

Daron Acemoglu:

I think power. I think the main issue, and that's why I am very happy to be bundled with Doug North and Oliver Williamson who are inspiring figures, but what I view as slightly different in my emphasis from the new institutional economics is that for me, power is central. Whereas Oliver and Doug never really grappled enough with who has power in economic relations and social relations enough.

So in some sense, the older institutional economics tradition was more sensitive to issues of power. And the Doug's great advance there was to bring in the neoclassical elements, property rights, incentives, markets and so on. But power fell by the wayside. And I think economics is enriched when we take power more seriously. And I think that's the place where we really need to think much more empirically as well as conceptually about regulation. Because I think one role of regulation is, and that's why representative government is key, is that the government has the capacity to be a very bad actor. Of course, we've seen that in history, but it also has the capacity in the form of representative government to bring regulations and laws and other practices that protect the weaker players and therefore level the playing field when power is such an important element.

Jon Hartley:

Yeah, I think that's a fascinating point. I think what you bring in a lot of your work to the table is new is really political economy dynamics. And I think this is segmented into my next question, but it's interesting to think about, well, you could have a very economically liberal regime, say Chile for the past 40 years, Chile after Pinochet. But ultimately if it ends up in some sort of high inequality state where people get very upset and that brings in a boric, effectively ushers in a socialist government, it's not really a stable long run equilibrium.

Daron Acemoglu:

It's not, but I think it's even deeper than that because the example that you give I think is, I don't disagree with it. If you overemphasize a particular aspect, you're going to have a backlash. But there is a deeper point, which is that unregulated markets themselves dig their own graves, not just because of the backlash, but because they are often going to create such power inequalities that they will have none of the aspects that we normally associate with markets. Nothing that Adam Smith, who was a very, very deep thinker, of course very, very aware of these inequities and imbalances, he would not have recognized that.

And I think the best example of that is actually Russia. Russia, after the Yeltsin reforms for a couple of years, try to be a very free market. Of course, we can talk about the details and there were many aspects that weren't true, but wherever they actually try to apply with some support from experts from the economics community as well, those free market principles, they created incredible inequalities and they created the beginning of the oligarchs and they created the beginning of the, so the rent-based economy that then Putin has so perfected. So I think that's an even more telling example than Pinochet's Chile about the immediate dangers.

Jon Hartley:

That's fascinating. So here's my, I guess next big question, and that's, is an inclusive institution like democracy really causing growth? You've written a lot on this. You have most recently your JPE paper democracy does cause growth, uses Freedom House quality for data as a measure for democracy. And you find that after a good number of years, in fact, decades after countries democratize or improved their Freedom House pol [inaudible 00:22:58] for scores, that there's greater economic growth in those countries compared to those that don't. But I'm curious just to challenge you a little bit. I mean there's some people that argue, "Well, there's an endogenous thing going on there and changes in democracy aren't truly exogenous. You need growth first to get the democratization, which may cause further the growth." But I'm just like, is it possible that democracy doesn't perhaps cause as much growth, but maybe-

Daron Acemoglu:

Of course it's possible. Of course it's possible. Look, I've been interested in democracy for more than 30 years. And in fact, some of my first papers on political economy were exactly on democracy and the power dynamics and democracy dynamics. And for a long time, actually for the first 10, 12 years of my interest on democracy, I never looked at the relationship between democracy and economic growth. And part of the reason was because I read the literature and the literature said, "No, there is no relationship." And I said, "Fine. Okay, I'll take that." And I didn't think that was crazy, and I didn't think that was crazy because I can see why the process of democratization is going to create a lot of tensions that could be distortionary.

And democracy itself is not a economic system that's in any way optimized for generating economic growth. Democracy is going to, if it functions, it's going to create forces towards redistribution, and that redistribution may sometimes not be good for growth, sometimes may be good for growth. Democracy is going to create new pathways for conflict over resources, and that may not be great either. So I always believed that democracy was necessary for long run systems that are stable and representative and accountable, but I thought, well, it may or may not be good for economic growth.

Then when I finally started looking at the data, the evidence was so clear and overwhelming that democracies actually do better economically, not because they're a perfect system, but the alternative is already so bad. And you see that in historical data and you see that in post-war data. And I think in all of these cases, of course reality is more complicated and I think there is a question as to whether whatever we learn from the six decades that followed World War II would translate to what's going to happen in the 21st century. I'm completely open to the hypothesis that in the 21st century things that are going to be in different, but then we should understand how different they're going to be and we should have the evidence for it.

But the following seems to be very clear, which is that democracies are redistributing more, they tax more, and they invest more in health and education, and somewhat weaker, but they're also better at dealing with monopolies and regulations and so on. So if you believe the IMF numbers, for example, on market opening, democratization is associated with market opening. So it shouldn't be like a complete shock to economists that in the medium run in the 10 to 20 year horizon, which is where we find our effects, democracies are associated with faster growth.

Jon Hartley:

Fascinating. I guess is it possible that could really just be that what comes hand in hand with democratic gains or things like property rights guaranteed by the courts and maybe somewhat more free market economically, both policies, I mean that could include antitrust, anti-monopoly sorts of things. I'm curious too, there are some other papers that are, I guess a bit opposed to some of your findings. There's this more recent Max Miller paper that looks at stock market declines after democratization, and maybe the stock market expects some redistribution things happening-

Daron Acemoglu:

No, but I like the Max Miller stuff a lot and I find it extremely consistent. And my interpretation is that, again, with in line with the facts that we find, democracies are not classically libertarian and they're not classically anti libertarian. So they do, that's why I mentioned the IMF measure of market openness. They further that, but then on the other hand, they do much more in terms of taxation and redistribution. I think that's part of the reason why Max's very nice results, I think are higher quality than ours because he's using more detailed data than the cross country cross region data that we exploit is following from that. They invest much more in protecting poor communities like especially in healthcare.

So it's a mixture of things that democracy does, but it's the kind of thing that you would expect democracy to do. And very importantly, I'm not saying democracy always works. That's what you expect it to do. Sometimes it does, sometimes it doesn't. But if it does what you expect it to do, it should redistribute more. It should invest more in education, it should invest more in healthcare, and it shouldn't be so good for monopolies.

Jon Hartley:

And so I'm curious, to push you a little bit further, there's been a lot of work by Andrei Shleifer and co-authors on, for example, the doing business index, which is kind of the famous, he's doing business index very well correlated with GDP per capita across countries. I'm curious what you think about that, but also curious what you think about the point that Andrei is made with Ed Glaeser, which is what about the East Asian Tigers? Look at Hong Kong, Singapore, South Korea, Taiwan, they all grew to having GDP per capita by the end of the 20th century to be on par with western countries of the United States almost. But then this was by the 1990s, all under non-democratic regimes. I'm curious what you think about these examples. Are these instances of maybe benevolent free market dictators like Lee Kuan Yew, are they more of an exception rather than norm? I'm curious.

Daron Acemoglu:

Yeah, I would say they are exceptional in the sense that these have emerged under circumstances that are very interesting and we need to understand the details. And they are not inconsistent with what I'm saying. In fact, in the Journal of Political Economy paper, democracy does cause economic growth. I think at the end, in the published version, this is shortened a lot, but one of the leading examples is South Korea because South Korea is a, A, great example of an economy that has done much better after democratization. Economic growth is significantly faster, both in terms of rate of growth and quality of growth. And secondly, it's very challenging to the view that these societies somehow get rich and then democracy comes as a luxury. So from the beginning, the dictatorship was contested in South Korea, and the democracy movement was a very prolonged conflictual movement that finally won with some support from the US in a changing geopolitical environment.

So I think the South Korean example is very interesting, but from the beginning also, I think both South Korea and Taiwan are very difficult to understand if you don't put them in the broader geopolitical context. So South Korean leaders from the beginning were very aware that they had to show that South Korea was doing economically better than North Korea. So growth promotion had to be a priority for Syngman Rhee and for General Park, just for their survival reasons. Similarly, Kuomintang had to show Taiwan was doing better than China. So these weren't unconstrained autocrats, that they were very constrained autocrats, and in particular, the area of a contestation was very much economic.

Jon Hartley:

Some people, in terms of thinking about mechanisms, it's totally possible that democracies really protecting us from the economically illiberal tendencies of non-democratic regimes, which I think are quite common that the-

Daron Acemoglu:

Again, I think I completely agree, they are protecting us. Again, economically liberal versus illiberal may not be the right label because I think we need to be clear what we mean by that. So I think if you draw the line at economic liberal versus illiberal at Milei in Argentina, no, I don't think that's right. Most democratic regimes are far to the left of Milei. But they are protecting us against the worst kind of oligarch causation of the economy.

Jon Hartley:

Fascinating. And just to get into Milei here, I'm curious, Andrei Shleifer published a paper for the Journal of Economic Literature a little while ago titled The Age of Milton Friedman, and I'm curious what you think about the era of market reforms in the late 20th century and their impact on GDP growth.

Daron Acemoglu:

I haven't read that paper, so I can't comment on the paper, but I'm happy to share my views of what the effects of Milton Friedman.

Jon Hartley:

Yeah, it's just a literature review. I mean, there's nothing, I think particularly new in the paper. I guess I just like the title of the paper, which is, and the point is it's just meant to describe, there was this era in the late 20th century, which there was all these historical examples that we have of big market reforms or shock therapy as some people like to controversially call it. Think post USSR, Eastern Europe, think East versus West Germany, Eastern Germany, Eastern Europe growing after USSR, Deng Xiaoping, China market reforms in the 1980s, India under the rail reforms of the 1990s, Chile after Pinochet, think Javier Milei, you mentioned in what he's currently attempting to do now in Argentina, trying to transition it away from, I'd say a relatively state influenced economy to a more market oriented one. I mean, these examples, sure, they may have led to more inequality and political instability in the long run, but they almost certainly have led to more growth. No, I mean, I don't think-

Daron Acemoglu:

I think this is something I also, Simon Johnson and I mentioned in our book Power and Progress as well, that I think it would be for us as both as economists, as people in the US market system, market ecosystem, it would be hubristic for us to claim victory for the market by comparing the US to Soviet Union or Mao to Deng Xiaoping. Absolutely no question. The Soviet system was bad for economic growth. Mao was horrible for economic growth. Communism is really bad for economic growth incentives, absolutely. But I think that comparison doesn't tell us much about the role of regulations, whether the Swedish system is better than the British system or whether the New Deal regulatory system is better than the deregulation that followed the '70s and especially post Reagan era.

I think that, again, just like the discussion that we had at the beginning has to be based on a case-based one. And I think in terms of Milton Friedman, I think that's my basic objection to, well, I have two big objections to Milton Friedman thought, completely recognizing that he's a brilliant, brilliant economist and with some very, very important contributions, and he was a master of price theory. So all of those are great. But Milton Friedman frames the question as if there is a clear answer implied by the first welfare theorem or the Adam Smith's invisible hand, and I disagree with that.

I think it's the case base one, and it's very clear, it's open and shut as far as I'm concerned that the Soviet system was much worse for economic growth than what the West had or what the United States has but not because of Adam Smith's first welfare theorem. In the US, even in the best of times, we are not near the first welfare theorem. And once you are in the second best world, there is no theorem in economics that says a little bit of market is better than central planning. It's really need to look at how central planning is done, et cetera. But I think history, empirical evidence are very clear. Central planning has never worked. And so of course the US was economically more successful and was bound to become even more so than the Soviet Union. But that again, doesn't tell us about Sweden versus the US. So I think that's where we have to use case-based decision, case-based analysis.

Now the second problem I have with Milton Friedman I think is his influence through the responsibility of business is the only social responsibility of business is profits. I think that's actually a deeper problem I have with Milton Friedman because I believe that that really pushes us in the wrong direction. I'm an economist, I love markets. I think the market system has amazing properties, and I believe there are forces along the invisible hand. But just like Adam Smith, Adam Smith never believed that people being purely selfish was a good foundation for a community, nor was it a descriptive way of understanding the world. And I think Friedman pushed business executives to be excessively focused on shareholders and especially short-term shareholders at the expense of more positively cooperative ways of forging relations between workers and capital. That would've been much better and that was much better when it functioned.

Jon Hartley:

It's fascinating. I mean it's interesting there's been on the shareholder, or sorry, the profit maximization point, I guess there's sort of been some rethinking here. And I personally agree too that it's gotten me a little bit too far, but in the sense that I think the shareholder maximization view rather than the profit maximization view is quite different in the sense that the nonprofit board, you're not necessarily trying to make profits that some do, but you're really trying to maximize on the mission, which is kind of guaranteed by the shareholders of the board members of a nonprofit. I think there's less hardcore visions of that. But I think too, the other point is just that often shareholders in that sense are often very much aligned with it's in their interest to maximize on the customer experience and those of other stakeholders. So I don't think that shareholder maximization [inaudible 00:40:15]-

Daron Acemoglu:

I think the shareholder maximization and the customer side is very interesting because if you go after short-term shareholder value, then you would really do badly. If you go after long-term shareholder value, then you might do better. But it's still just emphasizing shareholders really sours the relationship between labor and capital. And I think that's very important because we need more cooperative relations between labor and capital in all market systems, in all societies. And I think the natural tendency of many, not all, but many business executives would be my company is suddenly doing much better. We're making 20% more profits. I'll give you a little bit of a raise to my workers as well. They're part of the community here. They're part of the identity of the organization. It would be heartless, it would be a counterproductive to say, "No, no, your outside options haven't increased, so therefore I'm going to take all of this money myself and I'm going to give it to a few shareholders but no crumbs to you." But I think the shareholder value revolution essentially pushed many executives either to do that or to rationalize doing that.

Jon Hartley:

Fascinating. Any thoughts just on Sweden versus say US example? Curious if you have any thoughts on the World Bank doing business index, and this is originally slide for Simeon Djankov and much [inaudible 00:41:40]. I guess when we talk about regulation, I don't mean financial regulation and just even simple labor market kind of regulation, and even let's sort of push away taxes for a second. I think just how easy is it to do business? And Sweden scores pretty well, even though it's well known for being very redistributive type society, Scandinavian countries, they still have pretty liberal labor markets. And I think that's an interesting and important distinction to make and maybe something that makes a lot of western democracies particularly unique is that a lot of their economies, maybe some exceptions like France and a few others, they may have somewhat progressive taxation, but in general they have pretty liberal labor markets. I'm curious if you have any thoughts on that.

Daron Acemoglu:

Well, I mean, I don't know what you mean by liberal labor markets and-

Jon Hartley:

Ease of doing business. Things like 40-hour work week, not great, or just not a business, that kind of thing.

Daron Acemoglu:

So I think the business stuff came out of DeSoto's very important work. And obviously DeSoto was starting from the Peruvian context, for example, where there were insane restrictions on opening new businesses and things like that. And obviously that's horrible. The question again is this, how do you deal with regulations when you regulate the safety of, say pharmaceuticals, or when you introduce new regulations or additional regulations that cars have to meet? How do we think about that? And I think that's a complex issue. And again, I would say the best way is to be case by case. I don't think there is much reason for having onerous licensing requirements for hairdressers, but yes, you need more licensing for pharmacists and you need more licensing for doctors and surgeons. And I think that's those you have to navigate. But very importantly, I think Sweden is very good on those dimensions, but to a Chicago economist, their labor markets would be very illiberal.

Collective bargaining plays a very important role. There are industry level bargains, a lot of wage compression is a corporatist model. It's not just industry level unions and firms, but it's business associations and government that are part of the bargaining process. But it's done quite well in some dimensions. Now, I've also emphasized that we can't all be like Sweden because there are advantages that Sweden gets from being a small open economy in a very innovative world, but it has managed to be very innovative and redistribute. But it's also not just fiscal redistribution. It's not like let the market rip and then apply Diamond Merle's type reasoning. Actually, they have distorted all sorts of prices and especially in the labor market, and that's actually served them well.

Jon Hartley:

It's a fascinating point, I think. Totally a fair point on thinking about things on case by case basis. I want to just transition to AI and directed technical changes, the focus of a lot of your recent work, in particular, your most recent book, Power and Progress, which coauthored with Simon Johnson, where you argue that the gains of innovation have not been distributed broadly in history without some sort of political, economic and social struggle against the elite. And you also argue that automation or automated technologies are somewhat different than other technologies, and that there's a real risk of having unevenly distributed negative labor market consequences when technologies like say generative AI are substitutes instead of compliments to human labor. I'm curious, what do you recommend we do to make generative AI more complimentary towards humans? I know you've also spoken a bit in the book about potential for regulation. I'm curious, should we be doing anything right now in your mind today policy-wise in your mind?

Daron Acemoglu:

Thanks for bringing it to that topic. I think a good segue to that is actually built on what we were just talking about in terms of Sweden power, et cetera. And yes, I think there are some forces in the market system that create trickle down, but they're not unconditional and they're not always very powerful. And I think one way of understanding that is actually look at early 19th century factories. Early 19th century factories are a perfect specimen of why we should really worry about power. Workers were powerless against large employers because they did not have great employment opportunities outside of it. The conditions in the factory were very harsh, repressive, and they couldn't even ask for better conditions because any type of arrangement that smelled of collective bargaining was very heavily prosecuted. They didn't even have options for improving their lot by say, looking for another job because those were discouraged sometimes by law, sometimes by norms, sometimes by the power of employers.

So that's the sense in which I think you have to put Sweden in a historical context and you have to put power into the story that a more shared prosperity model in the UK I don't think would've been easy or feasible at all without the trade union movement emerging. But it's also not just the trade unions, because if you look at the other aspect of the early factories, you see that when the emphasis was on automation, meaning substituting machinery for things that especially qualified workers used to do, that often doesn't have great implications for labor. So for instance, if you look at the most dynamic sector of the British Industrial Revolution textiles, weavers, which was one of the jobs that was automated in the early 19th century, they experienced almost a drop to their wages to almost one third of the level that they were before automation.

So what's going on is that when automation is so rapid and there isn't anything counterbalancing it, then the opportunities for laborers is actually declining and making shared prosperity much harder. So what could counterbalance automation, I don't think it's just a question of unions asking higher wages. It really needs to be counterbalanced by something technological, and that has to be creating new tasks, new competencies. And when you look in the second stage of the industrial revolution, you see that wages start increasing because workers are doing new things. Technology is enabling them to do new things, and the market system is reallocating them to the new things, but embedded in better bargaining, so the trade unions, and embedded in better technologies.

So that is the historical precedent to my concerns about AI, that if we use AI too much for just automation, it's not going to be conducive to shared prosperity. Then the question becomes why do you think, why do I think that AI is likely to be used for more automation and nothing else? And I would say A, recent history, that's how we've used digital technologies. B, the business models of big companies that I think many big companies, tech companies, have now developed a business model where they make money either from selling tools for automation to other corporations or monetizing data like digital ads. And none of that is very conducive to generating new tasks that's going to share broad prosperity. And then C-

Jon Hartley:

How bout the digital ads tax is one [inaudible 00:50:35]-

Daron Acemoglu:

Yeah, that's one of the many policies that we can think about and I support. And then C, but that's actually a very important thing. In economics, we think innovators and business executives are going to do a profit maximizing thing, and there are good reasons for them to do so, but the ideology matters too. What you believe is the more likely, more exciting thing. And I think in the AI and tech field now AGI and building more and more capable and more and more human-like machines have become a fad. And that's I think pushing the industry more and more in the automation direction. And that's where, and if you want to understand where the policy suggestions that I make in the context of AI come from, I think that's the context for me. And digital ad tax fits into that why we may need an agency, federal agency that supports more pro-human pro worker directions of AI as think is going to be important, tax reform may be important for those.

But the most important idea that I try to articulate in my talks and in the book is that it is technically feasible and socially desirable to have a direction for these AI technologies that's more pro worker, that's more complimentary to workers.

Jon Hartley:

So firm size is I think a thing that's certainly something that's I think on your mind broadly. I'm going to just ask, I guess because we only have a few minutes left, just going to light you around just a few questions. And I'm just curious, just I think you have some interesting thoughts on this. One, firm size broadly an issue?

Daron Acemoglu:

Yes, I think so. I absolutely think so because again, it's because of power. So if we lived in a world without power issues, I would worry about firm size because of monopoly reasons. But that's, I think is secondary. We can worry about markups, how large are markups? Is the markup versus product offerings, trade-offs, et cetera, or we can be Schumpeterian and to say we need large firms for innovation. But I think once you have power issues, it really becomes a problem. And you see that in the tech sector. 25 years ago, the tech sector was most notable in its absence from Washington lobbying. Today, they are the biggest lobbyists humanity has ever seen. Why? Because they're so big. Once you're so big, you're so powerful, you have so much money, it's inevitable that you start setting the agenda in every domain.

Jon Hartley:

And very successful too.

Daron Acemoglu:

Very successful.

Jon Hartley:

For all these years of all these discussions about section 230 and-

Daron Acemoglu:

Absolutely.

Jon Hartley:

... all these issues, there's been no tech regulations so far. Okay. Second question. Legal origins versus colonial origins. Any thoughts? Obviously-

Daron Acemoglu:

Of course, colonial origins. Well, I mean I think legal origins are important. I wouldn't deny that, but you can see so much variety within the British Empire or within the French Empire. French law is used very differently in French colonies, different French colonies. English law is used very differently in different English colonies. So I think in general, and we didn't get to talk about much about culture, same thing with legal and culture. I am very open to these issues. I think they're very important, very interesting. Norms are super important. But where I depart from the standard emphasis of culture, for example, is that culture is very malleable. And the same thing, once you take power into account, what legal rules mean and how they're implemented is going to be very different.

Jon Hartley:

Great. And then my last question for you is I want to just talk to you about the diverging growth in advanced economies since 2010. You look at GDP per capita amongst advanced economies, the US is the really only country that seems to keep growing in per capita terms since the Great Recession. And we can do PPP and things look a little bit different, but other countries seem to be slowing down, other advanced economies, UK, Canada, much Western Europe, Japan. Is this divergence a meaningful thing in your mind? [inaudible 00:55:01].

Daron Acemoglu:

It is a meaningful thing. It is a meaningful thing, but I would say A, it's very meaningful and it's very clear, completely 100%. But if you go before the financial crisis, it's very unclear. So the US wasn't doing better. In fact was growing more slowly than France and Germany. Since 1980 overall, US is not the fastest grower among the Western club. So it's not something that's like fixed characteristics of the US.

Now, it may well be that tech boom has contributed to that, but I think there are other factors that we have to bear in mind. One is that the US actually dealt more comprehensively with the two big crises of the last 15 years, the financial crisis and the COVID crisis. But the financial crisis, I think the US did clean up its banking system more than European countries, and it did not create an austerity environment like the UK. To some degree Germany did. And after the COVID, they really, perhaps even overdid the spending, but they certainly did not underdo it. And I think those probably are important, but we await more systematic evidence of the role of financial things, role of technological adaptation versus the role of austerity versus fiscal spending on this.

Jon Hartley:

Maybe demographics or institutions-

Daron Acemoglu:

Demographics too. Yes, of course. Yes, yes.

Jon Hartley:

Well, Daron, I really want to thank you for coming on. Such a fascinating conversation. I look forward to waking up one morning and seeing the Nobel Committee announcing you as their laureate for that year. It's a huge honor to have you on and want to thank you so much for this amazing conversation.

Daron Acemoglu:

Thank you very much for inviting me and for these excellent questions and excellent conversation, Jon. Very nice to be on the program.

Jon Hartley:

Thanks so much, Daron. Today our guest was Daron Acemoglu, who is the institute professor of economics at the MIT Department of Economics. This is the Capitalism and Freedom in the Twenty-First Century Podcast where we talk about economics, markets and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.