WEBVTT - Interview With Daron Acemoglu: Masters in Business (Audio) 0:00:00.160 --> 0:00:02.440 The future may not be clear, but our commitment is 0:00:02.600 --> 0:00:04.440 so when you sit with an advisor at Meryll Lynch, 0:00:04.519 --> 0:00:07.160 we'll put your interests first. Visit mL dot com and 0:00:07.240 --> 0:00:09.640 learn more about Merrill Lynch. An affiliated Bank of America, 0:00:09.760 --> 0:00:12.240 Mary Lynch makes available products and services offered by Mery Lynch. 0:00:12.280 --> 0:00:14.600 Pierrece veneran Smith Incorporated or registered broker dealer remember s 0:00:14.640 --> 0:00:21.040 I PC. This is Masters in Business with Barry Ridholts 0:00:21.040 --> 0:00:26.479 on Boomberg Radio. This week on the podcast, I have 0:00:26.560 --> 0:00:29.800 an extra special guest, a professor from m I T 0:00:30.680 --> 0:00:35.280 named Darren Assumoglu. He is how do I describe him? 0:00:35.320 --> 0:00:38.680 He's just a rock star. This guy is one of 0:00:38.720 --> 0:00:43.240 the most cited economists in the world. Uh. He's published 0:00:43.720 --> 0:00:49.159 numerous papers. His curriculum vite list of grants and awards 0:00:49.159 --> 0:00:54.040 I'm not exaggerating runs pages and pages and pages. He 0:00:54.160 --> 0:00:57.680 was the recipient of the John Bates Clark Medal in 0:00:57.720 --> 0:01:00.360 two thousand and five that goes out to the anymist 0:01:00.480 --> 0:01:06.640 under forty with the biggest impact, most influence on the profession. He's, 0:01:06.680 --> 0:01:10.320 you know, highly highly regarded and and really a rock 0:01:10.400 --> 0:01:13.600 star up in M I T. If you are at 0:01:13.640 --> 0:01:19.080 all interested in things like the impact of institutions on economies, 0:01:19.200 --> 0:01:24.840 the role of technology and globalization on inequality, and how 0:01:25.240 --> 0:01:31.240 we think about and evaluate global economic growth. Uh. This 0:01:31.360 --> 0:01:34.560 is a deep dive, very much wonky and in the 0:01:34.600 --> 0:01:38.480 weeds sort of conversation. Anybody who's a fant of economics, 0:01:38.520 --> 0:01:43.240 anybody who is at all familiar with Professor Asimo Glue's work, 0:01:43.640 --> 0:01:46.479 is going to really enjoy this. Uh. It's about an 0:01:46.520 --> 0:01:52.080 hour of us really getting far into the uh weeds 0:01:52.120 --> 0:01:56.840 about all manners of economic conversation. So, with no further ado, 0:01:57.120 --> 0:02:06.400 here is my conversation with Professor Darren Asamoglu. I'm Barry 0:02:06.480 --> 0:02:09.880 rit Helts. You're listening to Masters in Business on Bloomberg 0:02:10.000 --> 0:02:14.640 Radio this weekend. On the show, I have Professor Darren Asamoglu. 0:02:14.800 --> 0:02:18.320 He is the killing professor of economics at m I T. 0:02:18.960 --> 0:02:22.600 And I'm just gonna give you an abbreviated version of 0:02:22.680 --> 0:02:25.560 his curriculum vitae, because if I went over the whole thing, 0:02:25.960 --> 0:02:28.400 we wouldn't have time to ask any more questions. He 0:02:28.520 --> 0:02:31.680 got both his masters and PhD from the London School 0:02:31.960 --> 0:02:35.480 of Economics, where he stayed on as a lecturer. He 0:02:35.560 --> 0:02:39.799 has been at M I T. Since, where he has 0:02:39.880 --> 0:02:44.079 become one of the world's most cited economists. His lists 0:02:44.120 --> 0:02:48.239 of awards and grants one pages. I cannot mention them all, 0:02:48.320 --> 0:02:52.440 but I must at least mention the John Bates Clark Medal, 0:02:52.680 --> 0:02:56.200 awarded to economists under the age of forty who are 0:02:56.320 --> 0:03:00.280 judged to have made the most significant contribution to economic 0:03:00.400 --> 0:03:03.600 thought and knowledge. He is the author of numerous books, 0:03:03.800 --> 0:03:09.240 most recently Why Nations Fail, which was published to widespread acclaim. 0:03:09.360 --> 0:03:12.520 Professor Darren Asimo Blu, Welcome to Bloomberg. It's great to 0:03:12.520 --> 0:03:15.800 be here. Unfortunately I'm no longer under forty. That's true, 0:03:15.880 --> 0:03:18.440 but in O five when you won the Clock Award, 0:03:18.480 --> 0:03:22.760 you were on forty. So let's let's I'm gonna go 0:03:22.960 --> 0:03:26.920 way back and start with your doctoral thesis, which I 0:03:27.080 --> 0:03:31.600 was tickled by the by the title Essays in micro 0:03:31.840 --> 0:03:37.560 Foundations of macro Economics. What are micro foundations of macroeconomics? 0:03:37.960 --> 0:03:41.040 It's that dreaded term, But what it really means is 0:03:41.840 --> 0:03:47.720 macro is so complicated we all struggle with it, and 0:03:47.800 --> 0:03:50.600 the micro foundations is to try to make it a 0:03:50.640 --> 0:03:53.760 little bit more comprehensible by looking at what's going on 0:03:53.800 --> 0:03:57.080 at the micro level, so rotter than say there is 0:03:57.080 --> 0:04:01.640 this relationship between unemployment and inflation or technology inequality. Let's 0:04:01.640 --> 0:04:04.200 dig deep and try to see what's going on at 0:04:04.200 --> 0:04:06.800 the micro level. What is it that new machines are doing, 0:04:07.200 --> 0:04:11.880 What is it that workers are trying to achieve, and 0:04:12.000 --> 0:04:14.440 what sorts of jobs they're looking for and what sorts 0:04:14.440 --> 0:04:17.920 of jobs they are matched for and all that. Now, 0:04:18.120 --> 0:04:21.520 now that's very um when you say micro, that's really 0:04:22.520 --> 0:04:25.960 going down to chunking it to small pieces. But you 0:04:26.080 --> 0:04:31.360 also write a lot about broad overarching themes such as 0:04:31.520 --> 0:04:35.560 economic institutions, and let's let's read a quick quote of yours. 0:04:36.160 --> 0:04:41.200 Economic institutions shape the incentives to become educated, to save 0:04:41.240 --> 0:04:45.279 and invest, to innovate and adopt new technologies. It is 0:04:45.320 --> 0:04:50.400 the political process that determines what economic institutions people live under, 0:04:50.839 --> 0:04:55.200 and the political institutions that determine how this process works. 0:04:55.480 --> 0:04:59.760 So let's talk a little bit about economic and political institutions. 0:04:59.760 --> 0:05:03.440 What sorts of institutions are you paying close attention to 0:05:03.960 --> 0:05:08.679 these days? When we talk of institutions, they're the broad 0:05:09.600 --> 0:05:14.080 fabric of society that, as the quote that you mentioned 0:05:14.400 --> 0:05:19.800 tries to capture, that shape opportunities and incentives. So central 0:05:19.920 --> 0:05:23.440 to our financial and economic world are the economic institutions 0:05:23.480 --> 0:05:27.160 that regulate how economic transactions take place. What sorts of 0:05:27.240 --> 0:05:32.039 loans can you give? Are supported by the political process. 0:05:32.600 --> 0:05:37.159 You know, if you have any chance of understanding why, say, 0:05:37.240 --> 0:05:40.239 Russian economic institutions look the way they ask in Russia, 0:05:40.600 --> 0:05:45.359 that puts most political power in the hands of a 0:05:45.400 --> 0:05:48.520 single person or a small clique around him. So in 0:05:48.560 --> 0:05:51.960 the same way, if we want to understand how economic 0:05:52.000 --> 0:05:55.719 institutions in the United States have evolved, we have to 0:05:55.800 --> 0:05:59.320 think about the political process also. So so you're referring 0:05:59.360 --> 0:06:04.520 to very broad systems like the legal system, the banking system, 0:06:04.920 --> 0:06:08.640 the educational system. These are the broad institutions that all 0:06:08.720 --> 0:06:12.800 work to shape our daily economic life. Absolutely absolutely, and 0:06:13.360 --> 0:06:16.520 we have to go from the broad, but sometimes you 0:06:16.560 --> 0:06:19.279 have to go down in the weeds. So if you 0:06:19.360 --> 0:06:24.040 want to think about, for instance, how the US labor 0:06:24.120 --> 0:06:29.480 force is going to adapt to the ever changing technological 0:06:29.600 --> 0:06:33.440 landscape or the globalization process, it's very important to like 0:06:33.560 --> 0:06:36.359 to look at these macro institutions, but also such things 0:06:36.360 --> 0:06:44.279 as vocational training, disability insurance system, lack thereof, lack of 0:06:45.000 --> 0:06:49.040 unemployment insurance. Those things are actually going to matter quite 0:06:49.160 --> 0:06:52.279 a bit. So it's both the micro and the macro. 0:06:52.560 --> 0:06:58.040 So why is it that some nations become democracies and 0:06:58.120 --> 0:07:02.600 the adjacent nation with similar natural resources in a similar 0:07:02.600 --> 0:07:07.640 cultural history make a turn and become either dictatorships or 0:07:07.839 --> 0:07:12.560 or something similarly unappealing. Well, I think that's another great question, 0:07:13.400 --> 0:07:21.840 and it gets to the bottom of the great paradigmatic 0:07:22.000 --> 0:07:25.440 question of how we should think of political development. And 0:07:26.320 --> 0:07:30.760 you know, going back to Marks and before Marks and 0:07:31.000 --> 0:07:34.720 also early twentieth century sociology, most people think of it, 0:07:35.240 --> 0:07:39.240 you know, using structural factors. You know, for instance, they think, oh, 0:07:39.280 --> 0:07:42.600 if a country gets rich, that it's going to become democratic, 0:07:42.720 --> 0:07:45.640 or you know Marxist thinkers, you know, oh, if a 0:07:45.680 --> 0:07:49.040 country has enough of a quote unquote capitalist class, they're 0:07:49.040 --> 0:07:53.120 going to become democratic. Actually, going back to our earlier discussion, 0:07:53.400 --> 0:07:56.680 it's really very much the devils in the details. It 0:07:56.800 --> 0:08:01.040 depends on how different groups are organized and whether the 0:08:01.080 --> 0:08:04.840 ability of a narrow segment of the population that could 0:08:04.880 --> 0:08:09.040 be coming from the old communist apparatic in the case 0:08:09.120 --> 0:08:12.440 of the transition economies, it could be some landowners or businessman, 0:08:12.640 --> 0:08:18.040 military personnel, or just like political machine operators, and whether 0:08:18.080 --> 0:08:21.840 they're strong enough to capture the system and set aside 0:08:21.840 --> 0:08:25.440 the demands of the broader population, or there is enough 0:08:25.520 --> 0:08:29.760 mobilization and contribution from political parties and civil society and 0:08:29.800 --> 0:08:34.440 the media so that the democratic process actually gaels and 0:08:34.720 --> 0:08:39.319 is able to act as the vehicle for sort of 0:08:39.360 --> 0:08:43.760 having people's voices heard, resolving conflicts, deliberation, and so on. 0:08:44.160 --> 0:08:46.720 Let's talk a little bit about the minimum wage, which 0:08:46.760 --> 0:08:49.960 has been an area of some debate in the country. 0:08:50.679 --> 0:08:54.200 We've seen a number of cities and some states razor 0:08:54.520 --> 0:08:58.640 minimum wage, and in some cases pretty substantially San Francisco, 0:08:59.000 --> 0:09:02.559 l A. Seattle. When when Seattle raised their minimum wage, 0:09:02.559 --> 0:09:05.320 I heard all sorts of dire warnings, this is it. 0:09:05.400 --> 0:09:07.880 They're going to cause a recession, They're going to cause unemployment, 0:09:08.200 --> 0:09:12.000 and yet Seattle seems to be booming. Um, what's the 0:09:12.040 --> 0:09:14.959 state of minimum wage in the United States and and 0:09:15.000 --> 0:09:18.000 what do we need to know about that ongoing debate. 0:09:19.360 --> 0:09:23.320 I think that's an area of considerable controversy within the 0:09:23.320 --> 0:09:28.760 economics profession, and I'm not an active participant in that debate, 0:09:28.800 --> 0:09:32.040 so I can give you sort of the outsider's perspective, 0:09:32.280 --> 0:09:35.480 and my summary of it would be that we know, 0:09:36.800 --> 0:09:40.160 if there is a very high level of minimum wage 0:09:40.679 --> 0:09:49.040 that destroys jobs, it creates the very opposite of the 0:09:49.080 --> 0:09:52.600 economic process that it intended to create, which was to 0:09:52.679 --> 0:09:56.080 help low wage workers they're priced out of jobs. On 0:09:56.120 --> 0:09:58.840 the other hand, if there's a moderate to low level 0:09:58.880 --> 0:10:01.280 of minimum wage, which is what you know US minimum 0:10:01.280 --> 0:10:04.400 wage has been for the last thirty forty years, if 0:10:04.559 --> 0:10:06.880 small increase in the minimum wage doesn't seem to have 0:10:06.960 --> 0:10:11.000 much of an adverse effect unemployment, and it might force 0:10:11.120 --> 0:10:15.840 employers to pay a little bit higher UH wage to 0:10:15.880 --> 0:10:19.040 their workers while at the same time reorganizing work in 0:10:19.120 --> 0:10:23.400 such a way that perhaps the lowest pay workers are 0:10:23.440 --> 0:10:27.720 doing a little bit more productive. So, in particular, UH 0:10:28.120 --> 0:10:30.760 workers can be trained a little bit more when they 0:10:30.800 --> 0:10:32.760 have to be paid more so that they are actually 0:10:32.840 --> 0:10:37.760 able to UH produce something commensurate with what they're being paid. UH. 0:10:38.200 --> 0:10:40.360 Employers are going to use a little bit more capital 0:10:40.400 --> 0:10:43.000 to go with these workers. So at the lower levels, 0:10:43.240 --> 0:10:45.480 there are going to be a lot of options for 0:10:45.520 --> 0:10:50.000 employers to make adjustments that don't lead to huge job losses. 0:10:50.240 --> 0:10:53.560 So when we are talking of the federal minimum wage 0:10:53.559 --> 0:10:55.920 in the United States, that's still at the very low level. 0:10:56.240 --> 0:10:59.320 When we are sort of getting up to fifteen dollars 0:10:59.360 --> 0:11:04.400 an hour, now, I think we are beyond the level 0:11:04.440 --> 0:11:06.520 where we are most comfortable that this is not going 0:11:06.559 --> 0:11:09.319 to create huge job losses. And if you think of 0:11:09.360 --> 0:11:13.320 twenty dollars there, we're really getting close to European or 0:11:13.480 --> 0:11:15.800 lower end of the European levels of minimum wages, and 0:11:16.080 --> 0:11:18.640 we have to be much more careful. So you're on 0:11:18.679 --> 0:11:21.640 the outside of that debate. Let's talk about a debate 0:11:21.679 --> 0:11:25.640 that you're not on the outside. Let's discuss inequality. I'm 0:11:25.640 --> 0:11:29.880 gonna pull a quote of of yours. The default position 0:11:29.920 --> 0:11:34.439 of economists is that inequality reflects unequal human capital of 0:11:34.559 --> 0:11:39.560 product productive capabilities. Some people make more than others measure 0:11:39.640 --> 0:11:44.120 to their contributions to their employees, to their employers. Why 0:11:44.200 --> 0:11:48.600 is that thesis wrong? I think there is a fairly 0:11:49.520 --> 0:11:55.640 broad consensus within economics that not all, but the bulk 0:11:55.960 --> 0:11:59.560 of inequality we observe in the labor market. And here 0:11:59.600 --> 0:12:02.760 I'm not talking about, like, you know, Warren Buffett making 0:12:02.800 --> 0:12:05.800 billions of dollars because he has billions of dollars to invest. 0:12:06.080 --> 0:12:09.200 So the fact that some engineer is being paid, you know, 0:12:09.400 --> 0:12:17.480 fifteen times as much as a technicians exactly. That is 0:12:17.800 --> 0:12:23.840 related to the human capital, skills, talents, creativity, expertise, problem 0:12:23.880 --> 0:12:27.880 solving ability of workers. It's not the whole thing because 0:12:27.920 --> 0:12:30.200 there is discrimination. It's not the whole thing because some 0:12:30.240 --> 0:12:32.280 people just turn out to be lucky. It's not the 0:12:32.280 --> 0:12:35.840 whole thing because some people get paid because they're doing 0:12:35.880 --> 0:12:39.200 really awful jobs and they need to be compensated for it. 0:12:39.640 --> 0:12:42.760 But the bulk of it is that human capital. But 0:12:43.280 --> 0:12:46.720 and here is the big butt. How that human capital 0:12:46.800 --> 0:12:52.640 is compensated is very much a function of technology and institutions. 0:12:52.679 --> 0:12:56.679 So by technology, for instance, I mean what's going on 0:12:56.840 --> 0:13:01.920 with robots, artificial intelligence, automation, all these new machines. Many 0:13:02.000 --> 0:13:05.680 of those may make certain types of skills and certain 0:13:05.720 --> 0:13:11.640 workers redundant and therefore act as a powerful generator of inequality. 0:13:12.040 --> 0:13:15.160 By institutions, I mean things like what we just talked 0:13:15.200 --> 0:13:19.520 about minimum wage unions. Those are going to be able 0:13:19.559 --> 0:13:24.199 to sometimes protect certain segments of the population from wage drops. 0:13:24.360 --> 0:13:27.080 So as a result, let's make a cross country comparison 0:13:27.200 --> 0:13:31.640 US and Germany to rich and highly complex economies. If 0:13:31.679 --> 0:13:34.320 you look at many trends like technology, how quickly they're 0:13:34.320 --> 0:13:38.520 adopting computers, robots, how their occupational structures are changing. There 0:13:38.520 --> 0:13:41.840 are many parallels between these two countries, but look at wages, 0:13:42.280 --> 0:13:47.199 you see quite major differences. Inequality has also increased in Germany, 0:13:47.440 --> 0:13:51.600 but they haven't experienced the same extent of the bottom 0:13:51.640 --> 0:13:54.640 of the wage distribution falling out in the United States. 0:13:54.640 --> 0:13:58.120 Over the last thirty years, for instance, we see that 0:13:58.920 --> 0:14:02.040 workers at the autom of the wage distribution does say, 0:14:02.080 --> 0:14:07.000 earning uh less than the median wage. They've had a 0:14:07.160 --> 0:14:10.400 terrible run. They've had periods of ten fifteen years where 0:14:10.400 --> 0:14:12.840 the real learnings have fallen or they have been stagnant, 0:14:13.080 --> 0:14:15.160 and you don't see a parallel to that in Germany. 0:14:15.440 --> 0:14:20.080 Let's let's talk about another comparison across countries, and I 0:14:20.080 --> 0:14:23.520 pulled this from one of your earlier papers. The comparison 0:14:23.600 --> 0:14:29.400 between CEO and worker salary varies dramatically by country. In Japan, 0:14:29.520 --> 0:14:32.320 it's eleven to one between the CEO and the lowest 0:14:32.320 --> 0:14:35.880 paid worker. In Germany, it's twelve to one. In the 0:14:35.960 --> 0:14:40.320 United States, it's almost five to one. How does that 0:14:40.440 --> 0:14:46.160 sort of gap versus are closest economic competitors developed. It's 0:14:46.200 --> 0:14:51.120 exactly the same thing. It's these institutional aspects, but perhaps 0:14:51.160 --> 0:14:54.760 with a little bit of the globalization process working out 0:14:55.160 --> 0:14:58.240 a little bit differently, So it didn't wouldn't globalizations similarly 0:14:58.320 --> 0:15:00.960 impact Japan and Germany? It does, and it is, but 0:15:01.880 --> 0:15:04.520 and I don't think that's that's the most important part. 0:15:04.720 --> 0:15:09.880 But US companies are more globalized and that has often 0:15:10.240 --> 0:15:13.960 led to more rewards for their CEOs, for for good 0:15:13.960 --> 0:15:16.400 and bad reasons. But I think the most important part 0:15:16.920 --> 0:15:20.280 is what's going on with the social norms and what's 0:15:20.360 --> 0:15:24.800 acceptable for CEOs to be paid. So Germany and Japan 0:15:24.840 --> 0:15:27.640 are very modern economies in many ways, but they still 0:15:27.720 --> 0:15:31.480 have a sort of a corporative culture leftover, and that's 0:15:31.800 --> 0:15:37.320 got some costs, but it also creates a more cohesive 0:15:37.440 --> 0:15:42.360 internal organization for many structures, and it imposes that, you know, 0:15:42.600 --> 0:15:45.240 a rising tide should lift all boats, at least within 0:15:45.280 --> 0:15:49.800 the company. So you cannot have the workers using their 0:15:49.880 --> 0:15:53.840 wages and jobs and masses while the CEOs are getting 0:15:54.800 --> 0:15:58.480 tens of millions of dollars of bonuses, and that's totally 0:15:58.520 --> 0:16:01.280 acceptable in the United States. Let's talk a little bit 0:16:01.280 --> 0:16:07.440 about technology. You wrote on robots and jobs. Evidence from 0:16:07.680 --> 0:16:11.760 US labor market. An analysis that looked at the effect 0:16:11.800 --> 0:16:16.800 of the increased use of industrial robots between and two 0:16:16.840 --> 0:16:20.320 thousand and seven on on the labor markets. What did 0:16:20.360 --> 0:16:26.760 you find? Summarizing it briefly, I would say we found 0:16:26.880 --> 0:16:33.320 that more robots is associated with lower employment and lower 0:16:33.360 --> 0:16:38.560 wages in the local labor market. The effects are not enormous, 0:16:38.680 --> 0:16:42.440 meaning that we're not talking millions of people losing their 0:16:42.520 --> 0:16:45.200 jobs or anything like that, but they are also large 0:16:45.240 --> 0:16:49.240 if you look at it from the viewpoint of what 0:16:49.320 --> 0:16:53.680 does the stock of robots that we have imply, And 0:16:53.840 --> 0:16:57.000 roughly speaking, what we are finding is something like one 0:16:57.040 --> 0:16:59.800 more robot is leading to the loss of jobs but 0:17:00.080 --> 0:17:04.600 between three to six workers in the local labor market. Now, 0:17:05.840 --> 0:17:08.879 that's not a huge effect because we don't have that 0:17:08.920 --> 0:17:13.399 many robots, but projecting it in the future, we have 0:17:13.600 --> 0:17:19.119 to be quite aware that we are going to be 0:17:19.240 --> 0:17:23.720 facing both great opportunities because these robots and artificially intelligence 0:17:23.760 --> 0:17:27.200 technologies are going to increase productivity, but huge challenges also. 0:17:27.720 --> 0:17:29.960 So let's not talk about robots a second. I want 0:17:29.960 --> 0:17:33.639 to talk about software and technology. I run a small 0:17:33.720 --> 0:17:38.800 office where fourteen people, and I know based on my 0:17:38.880 --> 0:17:43.320 experience at firms ten and twenty years ago. What we 0:17:43.400 --> 0:17:46.719 managed to do with fourteen people it would have taken 0:17:46.880 --> 0:17:51.800 fifty or a hundred people twenty years ago. Everything from 0:17:51.920 --> 0:17:55.639 the content we generate to the sort of tax loss 0:17:55.680 --> 0:17:59.239 harvesting and portfolio rebalance you push a button today that 0:17:59.359 --> 0:18:02.680 used to be for accountants in green ice shades working 0:18:02.720 --> 0:18:06.840 for a week to get all that done. How significant. 0:18:07.600 --> 0:18:10.640 Let me let me phrase that differently. Is the fear 0:18:10.720 --> 0:18:13.040 that technology is going to take all our jobs away 0:18:13.160 --> 0:18:16.560 unfounded or is there a genuine reason to be concerned? 0:18:16.840 --> 0:18:18.880 Yes and no. So let me put it this way. 0:18:18.960 --> 0:18:21.119 Let me first start with the yes part, which is 0:18:21.200 --> 0:18:28.159 that people are somewhat complacent about what the future of 0:18:28.200 --> 0:18:30.960 the labor market will look like. And that's for two reasons. 0:18:31.359 --> 0:18:35.320 The first one is that we are told, and with 0:18:35.480 --> 0:18:40.520 good reason, that technology is what brings economic growth, what 0:18:40.640 --> 0:18:45.920 brings prosperity, So why should we be afraid absolutely right. Second, 0:18:46.359 --> 0:18:50.679 there have been economists in the past, some of the 0:18:50.720 --> 0:18:56.320 greatest minds of our profession, who predicted the end of work, 0:18:56.720 --> 0:19:01.120 John Maynard Keynes, the founder of macroeconomics, Leon tv, Herod Simon, 0:19:01.800 --> 0:19:04.040 and they didn't turn out to be right, at least 0:19:04.080 --> 0:19:06.399 in the medium term. So we say, why should it 0:19:06.400 --> 0:19:10.480 be different this time? But I think the truth of 0:19:10.520 --> 0:19:15.639 the matter is that many technologies, and automation technologies and 0:19:15.800 --> 0:19:18.639 parts of software being examples of it as well as 0:19:18.800 --> 0:19:23.239 robots do displace workers. They replace workers and tasks that 0:19:23.320 --> 0:19:25.840 labor was previously performing, and they do it better, they 0:19:25.880 --> 0:19:28.560 do it faster, they do it more cheaply. The reason 0:19:28.640 --> 0:19:34.880 why this doesn't spell doom for the workforce its two folds. 0:19:34.880 --> 0:19:37.480 First of all, at the same time that they do that, 0:19:37.880 --> 0:19:41.800 they reduce costs, and as we become richer, we deploy 0:19:41.880 --> 0:19:45.879 these workers into other sectors. We consume more cars, we 0:19:45.920 --> 0:19:50.560 consume more information, we consume more widgets, and we consume 0:19:50.600 --> 0:19:54.080 more services, and all of these require workers. And secondly, 0:19:54.400 --> 0:19:57.680 we also create new tasks, new jobs, new industries to 0:19:58.400 --> 0:20:01.400 soak up all of the labor that's been freed from 0:20:01.440 --> 0:20:05.439 the task that they were previously performing. So it's a 0:20:05.480 --> 0:20:08.040 good picture on the one hand, but it's a difficult 0:20:08.040 --> 0:20:11.040 picture because it does involve people losing their jobs and 0:20:11.119 --> 0:20:14.760 going through the painful process of reallocation. And sometimes that 0:20:14.880 --> 0:20:18.320 process can be slow, Sometimes that process can be incomplete, 0:20:18.480 --> 0:20:21.000 and I think what we are finding with robots and 0:20:21.040 --> 0:20:23.760 what we are finding with some other automation technologies is 0:20:23.840 --> 0:20:29.720 that those pains of reallocation, and in particular, perhaps because 0:20:29.760 --> 0:20:33.440 these technologies are a little bit more disruptive than other 0:20:33.520 --> 0:20:36.640 ones that we've implemented over the last twenty years, it's 0:20:36.680 --> 0:20:41.159 more painful. Let's talk about your book Why Nations Fail, 0:20:41.440 --> 0:20:47.159 which origins of power, prosperity and poverty. Uh, this is 0:20:47.200 --> 0:20:54.280 really an epic magnum opus which has been wildly received 0:20:54.320 --> 0:20:58.720 and highly regarded. In the book, you talk about institutions, 0:20:58.720 --> 0:21:04.160 institutions institution, as we discussed, You discuss how significant institutions 0:21:04.200 --> 0:21:09.960 are to a robust and well functioning economy. How different 0:21:10.280 --> 0:21:15.600 is this framework for analyzing um economic progress from from 0:21:15.600 --> 0:21:21.760 what preceded anything in science built on the shoulders of giants. 0:21:22.400 --> 0:21:28.480 I think we very much benefited build on the work 0:21:28.520 --> 0:21:31.440 of others. Douglas North, who is a Nobel Prize winner, 0:21:32.200 --> 0:21:36.520 was the first person perhaps to really push this institutional perspective. 0:21:36.920 --> 0:21:41.040 But what we have done is go beyond that, try 0:21:41.119 --> 0:21:47.000 to explain more varied sorts of economic and political relations 0:21:47.000 --> 0:21:50.320 with institutions, be much more systematic about how they work, 0:21:50.440 --> 0:21:55.200 and bring both empirical and historical analysis to further understand 0:21:55.400 --> 0:22:00.680 how these institutional equilibria emerge and why these institutional objectories 0:22:00.800 --> 0:22:06.719 diverge across countries. So define for us what is institutional drift. 0:22:07.359 --> 0:22:11.840 Here we are talking of institutions as the broad organization 0:22:11.880 --> 0:22:17.280 of society. Who has political power, how do you regulate trade, 0:22:18.040 --> 0:22:21.280 how do you enforce property rights, how do course function? 0:22:21.880 --> 0:22:25.440 Who has opportunities in society? And if you look at 0:22:25.760 --> 0:22:28.720 two societies that look very similar at a point in time, 0:22:28.800 --> 0:22:33.720 say go back to the fourteenth century, and observe them 0:22:33.760 --> 0:22:38.640 over decades, perhaps even centuries, what you're going to see 0:22:38.760 --> 0:22:42.080 is that, even though they look similar at a certain 0:22:42.119 --> 0:22:45.880 point in time, they will start drifting apart a little bit. 0:22:46.240 --> 0:22:48.800 You're going to see that they're going to face somewhat 0:22:48.800 --> 0:22:51.480 different challenges, They're going to respond to these challenges a 0:22:51.520 --> 0:22:57.480 little differently, and the nature of the social relation is 0:22:57.520 --> 0:23:02.200 going to look quite different in fifty or one hundred years. 0:23:02.200 --> 0:23:04.960 So you see that, for instance, in the Middle Ages, 0:23:05.480 --> 0:23:08.040 Eastern Europe and Western Europe at some point look very 0:23:08.080 --> 0:23:15.760 differ very similar. They have similar hierarchies, aristocrats and kings, 0:23:15.800 --> 0:23:21.760 and some parliamentary institutions feudal labor relations, cities providing some 0:23:21.840 --> 0:23:26.520 industrial output, and then roll forward one hundred years and 0:23:26.560 --> 0:23:30.200 suddenly you see Western Europe has somewhat bigger cities, merchants 0:23:30.200 --> 0:23:34.159 are a little bit more assertive, feudal relations have just 0:23:34.400 --> 0:23:39.200 slightly eroded relative to Eastern Europe. And then that institutional 0:23:39.280 --> 0:23:42.560 drift comes into contact with a big shock like a 0:23:42.560 --> 0:23:46.320 demographic collapse during the Black Death or new trading or 0:23:46.320 --> 0:23:49.639 political opportunities. And then those societies that have drifted a 0:23:49.640 --> 0:23:55.000 little bit apart suddenly see their trajectories diverged much more radically. 0:23:55.600 --> 0:23:58.640 So let's talk a little bit about the opposite sort 0:23:58.640 --> 0:24:02.280 of question, which is, you're building on the work of 0:24:02.400 --> 0:24:09.560 previous economists who looked at institutions. Where does traditional political science, sociology, 0:24:09.680 --> 0:24:16.160 or economics fail the evaluation of uh poverty and economics. 0:24:16.160 --> 0:24:20.159 We we have persistence, persistent poverty in all sorts of 0:24:20.200 --> 0:24:25.240 places around the world. What do we misunderstanding about those geographies? 0:24:25.960 --> 0:24:30.880 I think understanding poverty is a very difficult question, so 0:24:31.040 --> 0:24:34.800 from a societal From a societal point of view, I mean, 0:24:34.880 --> 0:24:37.800 look at it this way. We live in such great comfort, 0:24:37.840 --> 0:24:42.760 we're uh surrounded by widgets, the hardest type of work 0:24:42.880 --> 0:24:47.960 is gone. We have amazing abundance around us, and then 0:24:48.000 --> 0:24:51.760 we think what's going on in parts of Sub Saharan Africa. 0:24:52.280 --> 0:24:58.440 People have access to income per capita daily income one 0:24:58.680 --> 0:25:01.000 or one eightieth of what we have here. It's just 0:25:01.160 --> 0:25:04.280 so difficult for us to understand how that could exist 0:25:04.320 --> 0:25:08.800 in this globalized, connected, unified world. It is a difficult problem. 0:25:09.119 --> 0:25:13.199 But we have also failed to some degree because we 0:25:13.240 --> 0:25:18.480 have gone after some somewhat facile answers such as geography 0:25:18.600 --> 0:25:23.560 or culture or oh just it's inspired leadership that gets 0:25:23.560 --> 0:25:26.080 out of us out of poverty. And I think the 0:25:26.119 --> 0:25:28.879 truth of the matter is that you really need to 0:25:28.920 --> 0:25:32.639 think much more systematically about what opportunities people have, what 0:25:32.800 --> 0:25:36.360 incentives they have to use those opportunities, and then that's 0:25:36.359 --> 0:25:39.880 going to bring you to these institutional equilibria that we've 0:25:39.920 --> 0:25:44.680 already talked about briefly. Why our economic institutions different, why 0:25:44.720 --> 0:25:48.240 political institutions are different. Why is it that people in 0:25:48.520 --> 0:25:52.440 Sierra Leone or Chat or the Central African Republic don't 0:25:52.480 --> 0:25:56.320 have those opportunities? Why don't they try to create those opportunities? 0:25:56.359 --> 0:25:59.560 And you see there, you really need to get into 0:25:59.560 --> 0:26:02.480 the d tales of these political equilibria. Who has political power, 0:26:02.560 --> 0:26:04.439 what do they benefit from? How is it that they 0:26:04.520 --> 0:26:08.320 can to get away with creating wealth for themselves and 0:26:08.400 --> 0:26:13.919 poverty for millions. So let's talk about extractive institutions. What 0:26:14.040 --> 0:26:18.359 are extractive institutions and how do they differ from the 0:26:18.440 --> 0:26:22.879 traditional rent seeking epithet we've seen tossed about. So what 0:26:23.000 --> 0:26:25.600 I just described a second ago without using the term, 0:26:26.680 --> 0:26:32.080 were the extractive institutions. Extractive institutions are any institutional arrangement 0:26:32.200 --> 0:26:38.360 that enable a group of people to extract resources directly 0:26:38.440 --> 0:26:41.800 or indirectly from the rest of society, and they do 0:26:41.920 --> 0:26:47.400 so by creating a tilted playing field, by destroying opportunities 0:26:48.400 --> 0:26:52.840 and by destroying incentives for the rest of society. So 0:26:53.200 --> 0:26:58.680 it is similar to what people talk of rent seeking, 0:26:58.920 --> 0:27:02.359 but it's broader because when you toko rent seeking, you 0:27:02.480 --> 0:27:06.520 you're thinking of corruption and what government officials do or 0:27:06.600 --> 0:27:11.480 sometimes what some businesses might do in with the politicians, 0:27:11.520 --> 0:27:16.680 as in the chronic capitalism. But extractive institutions, by putting 0:27:16.720 --> 0:27:21.159 the emphasis on this opportunity incentive and the tilted playing field, 0:27:21.480 --> 0:27:25.200 brings out the parallels between say a system like what 0:27:25.280 --> 0:27:28.760 you had in Egypt under Wabarek, where every businessman had 0:27:28.800 --> 0:27:31.600 to be connected to his m DP party and give 0:27:31.680 --> 0:27:35.160 him kick bads to say, feudal Europe where you don't 0:27:35.160 --> 0:27:38.040 have corruption. You don't have any one of those things, 0:27:38.080 --> 0:27:41.359 but you have a system that makes people servile, labor 0:27:41.440 --> 0:27:44.320 produce under coercion, and the benefits go to a well 0:27:44.359 --> 0:27:47.800 defined group of people. You discuss equality in terms of 0:27:47.840 --> 0:27:54.200