Speaker 1: The future may not be clear, but our commitment is
Speaker 1: so when you sit with an advisor at Meryll Lynch,
Speaker 1: we'll put your interests first. Visit mL dot com and
Speaker 1: learn more about Merrill Lynch. An affiliated Bank of America,
Speaker 1: Mary Lynch makes available products and services offered by Mery Lynch.
Speaker 1: Pierrece veneran Smith Incorporated or registered broker dealer remember s
Speaker 1: I PC. This is Masters in Business with Barry Ridholts
Speaker 1: on Boomberg Radio. This week on the podcast, I have
Speaker 1: an extra special guest, a professor from m I T
Speaker 1: named Darren Assumoglu. He is how do I describe him?
Speaker 1: He's just a rock star. This guy is one of
Speaker 1: the most cited economists in the world. Uh. He's published
Speaker 1: numerous papers. His curriculum vite list of grants and awards
Speaker 1: I'm not exaggerating runs pages and pages and pages. He
Speaker 1: was the recipient of the John Bates Clark Medal in
Speaker 1: two thousand and five that goes out to the anymist
Speaker 1: under forty with the biggest impact, most influence on the profession. He's,
Speaker 1: you know, highly highly regarded and and really a rock
Speaker 1: star up in M I T. If you are at
Speaker 1: all interested in things like the impact of institutions on economies,
Speaker 1: the role of technology and globalization on inequality, and how
Speaker 1: we think about and evaluate global economic growth. Uh. This
Speaker 1: is a deep dive, very much wonky and in the
Speaker 1: weeds sort of conversation. Anybody who's a fant of economics,
Speaker 1: anybody who is at all familiar with Professor Asimo Glue's work,
Speaker 1: is going to really enjoy this. Uh. It's about an
Speaker 1: hour of us really getting far into the uh weeds
Speaker 1: about all manners of economic conversation. So, with no further ado,
Speaker 1: here is my conversation with Professor Darren Asamoglu. I'm Barry
Speaker 1: rit Helts. You're listening to Masters in Business on Bloomberg
Speaker 1: Radio this weekend. On the show, I have Professor Darren Asamoglu.
Speaker 1: He is the killing professor of economics at m I T.
Speaker 1: And I'm just gonna give you an abbreviated version of
Speaker 1: his curriculum vitae, because if I went over the whole thing,
Speaker 1: we wouldn't have time to ask any more questions. He
Speaker 1: got both his masters and PhD from the London School
Speaker 1: of Economics, where he stayed on as a lecturer. He
Speaker 1: has been at M I T. Since, where he has
Speaker 1: become one of the world's most cited economists. His lists
Speaker 1: of awards and grants one pages. I cannot mention them all,
Speaker 1: but I must at least mention the John Bates Clark Medal,
Speaker 1: awarded to economists under the age of forty who are
Speaker 1: judged to have made the most significant contribution to economic
Speaker 1: thought and knowledge. He is the author of numerous books,
Speaker 1: most recently Why Nations Fail, which was published to widespread acclaim.
Speaker 1: Professor Darren Asimo Blu, Welcome to Bloomberg. It's great to
Speaker 1: be here. Unfortunately I'm no longer under forty. That's true,
Speaker 1: but in O five when you won the Clock Award,
Speaker 1: you were on forty. So let's let's I'm gonna go
Speaker 1: way back and start with your doctoral thesis, which I
Speaker 1: was tickled by the by the title Essays in micro
Speaker 1: Foundations of macro Economics. What are micro foundations of macroeconomics?
Speaker 1: It's that dreaded term, But what it really means is
Speaker 1: macro is so complicated we all struggle with it, and
Speaker 1: the micro foundations is to try to make it a
Speaker 1: little bit more comprehensible by looking at what's going on
Speaker 1: at the micro level, so rotter than say there is
Speaker 1: this relationship between unemployment and inflation or technology inequality. Let's
Speaker 1: dig deep and try to see what's going on at
Speaker 1: the micro level. What is it that new machines are doing,
Speaker 1: What is it that workers are trying to achieve, and
Speaker 1: what sorts of jobs they're looking for and what sorts
Speaker 1: of jobs they are matched for and all that. Now,
Speaker 1: now that's very um when you say micro, that's really
Speaker 1: going down to chunking it to small pieces. But you
Speaker 1: also write a lot about broad overarching themes such as
Speaker 1: economic institutions, and let's let's read a quick quote of yours.
Speaker 1: Economic institutions shape the incentives to become educated, to save
Speaker 1: and invest, to innovate and adopt new technologies. It is
Speaker 1: the political process that determines what economic institutions people live under,
Speaker 1: and the political institutions that determine how this process works.
Speaker 1: So let's talk a little bit about economic and political institutions.
Speaker 1: What sorts of institutions are you paying close attention to
Speaker 1: these days? When we talk of institutions, they're the broad
Speaker 1: fabric of society that, as the quote that you mentioned
Speaker 1: tries to capture, that shape opportunities and incentives. So central
Speaker 1: to our financial and economic world are the economic institutions
Speaker 1: that regulate how economic transactions take place. What sorts of
Speaker 1: loans can you give? Are supported by the political process.
Speaker 1: You know, if you have any chance of understanding why, say,
Speaker 1: Russian economic institutions look the way they ask in Russia,
Speaker 1: that puts most political power in the hands of a
Speaker 1: single person or a small clique around him. So in
Speaker 1: the same way, if we want to understand how economic
Speaker 1: institutions in the United States have evolved, we have to
Speaker 1: think about the political process also. So so you're referring
Speaker 1: to very broad systems like the legal system, the banking system,
Speaker 1: the educational system. These are the broad institutions that all
Speaker 1: work to shape our daily economic life. Absolutely absolutely, and
Speaker 1: we have to go from the broad, but sometimes you
Speaker 1: have to go down in the weeds. So if you
Speaker 1: want to think about, for instance, how the US labor
Speaker 1: force is going to adapt to the ever changing technological
Speaker 1: landscape or the globalization process, it's very important to like
Speaker 1: to look at these macro institutions, but also such things
Speaker 1: as vocational training, disability insurance system, lack thereof, lack of
Speaker 1: unemployment insurance. Those things are actually going to matter quite
Speaker 1: a bit. So it's both the micro and the macro.
Speaker 1: So why is it that some nations become democracies and
Speaker 1: the adjacent nation with similar natural resources in a similar
Speaker 1: cultural history make a turn and become either dictatorships or
Speaker 1: or something similarly unappealing. Well, I think that's another great question,
Speaker 1: and it gets to the bottom of the great paradigmatic
Speaker 1: question of how we should think of political development. And
Speaker 1: you know, going back to Marks and before Marks and
Speaker 1: also early twentieth century sociology, most people think of it,
Speaker 1: you know, using structural factors. You know, for instance, they think, oh,
Speaker 1: if a country gets rich, that it's going to become democratic,
Speaker 1: or you know Marxist thinkers, you know, oh, if a
Speaker 1: country has enough of a quote unquote capitalist class, they're
Speaker 1: going to become democratic. Actually, going back to our earlier discussion,
Speaker 1: it's really very much the devils in the details. It
Speaker 1: depends on how different groups are organized and whether the
Speaker 1: ability of a narrow segment of the population that could
Speaker 1: be coming from the old communist apparatic in the case
Speaker 1: of the transition economies, it could be some landowners or businessman,
Speaker 1: military personnel, or just like political machine operators, and whether
Speaker 1: they're strong enough to capture the system and set aside
Speaker 1: the demands of the broader population, or there is enough
Speaker 1: mobilization and contribution from political parties and civil society and
Speaker 1: the media so that the democratic process actually gaels and
Speaker 1: is able to act as the vehicle for sort of
Speaker 1: having people's voices heard, resolving conflicts, deliberation, and so on.
Speaker 1: Let's talk a little bit about the minimum wage, which
Speaker 1: has been an area of some debate in the country.
Speaker 1: We've seen a number of cities and some states razor
Speaker 1: minimum wage, and in some cases pretty substantially San Francisco,
Speaker 1: l A. Seattle. When when Seattle raised their minimum wage,
Speaker 1: I heard all sorts of dire warnings, this is it.
Speaker 1: They're going to cause a recession, They're going to cause unemployment,
Speaker 1: and yet Seattle seems to be booming. Um, what's the
Speaker 1: state of minimum wage in the United States and and
Speaker 1: what do we need to know about that ongoing debate.
Speaker 1: I think that's an area of considerable controversy within the
Speaker 1: economics profession, and I'm not an active participant in that debate,
Speaker 1: so I can give you sort of the outsider's perspective,
Speaker 1: and my summary of it would be that we know,
Speaker 1: if there is a very high level of minimum wage
Speaker 1: that destroys jobs, it creates the very opposite of the
Speaker 1: economic process that it intended to create, which was to
Speaker 1: help low wage workers they're priced out of jobs. On
Speaker 1: the other hand, if there's a moderate to low level
Speaker 1: of minimum wage, which is what you know US minimum
Speaker 1: wage has been for the last thirty forty years, if
Speaker 1: small increase in the minimum wage doesn't seem to have
Speaker 1: much of an adverse effect unemployment, and it might force
Speaker 1: employers to pay a little bit higher UH wage to
Speaker 1: their workers while at the same time reorganizing work in
Speaker 1: such a way that perhaps the lowest pay workers are
Speaker 1: doing a little bit more productive. So, in particular, UH
Speaker 1: workers can be trained a little bit more when they
Speaker 1: have to be paid more so that they are actually
Speaker 1: able to UH produce something commensurate with what they're being paid. UH.
Speaker 1: Employers are going to use a little bit more capital
Speaker 1: to go with these workers. So at the lower levels,
Speaker 1: there are going to be a lot of options for
Speaker 1: employers to make adjustments that don't lead to huge job losses.
Speaker 1: So when we are talking of the federal minimum wage
Speaker 1: in the United States, that's still at the very low level.
Speaker 1: When we are sort of getting up to fifteen dollars
Speaker 1: an hour, now, I think we are beyond the level
Speaker 1: where we are most comfortable that this is not going
Speaker 1: to create huge job losses. And if you think of
Speaker 1: twenty dollars there, we're really getting close to European or
Speaker 1: lower end of the European levels of minimum wages, and
Speaker 1: we have to be much more careful. So you're on
Speaker 1: the outside of that debate. Let's talk about a debate
Speaker 1: that you're not on the outside. Let's discuss inequality. I'm
Speaker 1: gonna pull a quote of of yours. The default position
Speaker 1: of economists is that inequality reflects unequal human capital of
Speaker 1: product productive capabilities. Some people make more than others measure
Speaker 1: to their contributions to their employees, to their employers. Why
Speaker 1: is that thesis wrong? I think there is a fairly
Speaker 1: broad consensus within economics that not all, but the bulk
Speaker 1: of inequality we observe in the labor market. And here
Speaker 1: I'm not talking about, like, you know, Warren Buffett making
Speaker 1: billions of dollars because he has billions of dollars to invest.
Speaker 1: So the fact that some engineer is being paid, you know,
Speaker 1: fifteen times as much as a technicians exactly. That is
Speaker 1: related to the human capital, skills, talents, creativity, expertise, problem
Speaker 1: solving ability of workers. It's not the whole thing because
Speaker 1: there is discrimination. It's not the whole thing because some
Speaker 1: people just turn out to be lucky. It's not the
Speaker 1: whole thing because some people get paid because they're doing
Speaker 1: really awful jobs and they need to be compensated for it.
Speaker 1: But the bulk of it is that human capital. But
Speaker 1: and here is the big butt. How that human capital
Speaker 1: is compensated is very much a function of technology and institutions.
Speaker 1: So by technology, for instance, I mean what's going on
Speaker 1: with robots, artificial intelligence, automation, all these new machines. Many
Speaker 1: of those may make certain types of skills and certain
Speaker 1: workers redundant and therefore act as a powerful generator of inequality.
Speaker 1: By institutions, I mean things like what we just talked
Speaker 1: about minimum wage unions. Those are going to be able
Speaker 1: to sometimes protect certain segments of the population from wage drops.
Speaker 1: So as a result, let's make a cross country comparison
Speaker 1: US and Germany to rich and highly complex economies. If
Speaker 1: you look at many trends like technology, how quickly they're
Speaker 1: adopting computers, robots, how their occupational structures are changing. There
Speaker 1: are many parallels between these two countries, but look at wages,
Speaker 1: you see quite major differences. Inequality has also increased in Germany,
Speaker 1: but they haven't experienced the same extent of the bottom
Speaker 1: of the wage distribution falling out in the United States.
Speaker 1: Over the last thirty years, for instance, we see that
Speaker 1: workers at the autom of the wage distribution does say,
Speaker 1: earning uh less than the median wage. They've had a
Speaker 1: terrible run. They've had periods of ten fifteen years where
Speaker 1: the real learnings have fallen or they have been stagnant,
Speaker 1: and you don't see a parallel to that in Germany.
Speaker 1: Let's let's talk about another comparison across countries, and I
Speaker 1: pulled this from one of your earlier papers. The comparison
Speaker 1: between CEO and worker salary varies dramatically by country. In Japan,
Speaker 1: it's eleven to one between the CEO and the lowest
Speaker 1: paid worker. In Germany, it's twelve to one. In the
Speaker 1: United States, it's almost five to one. How does that
Speaker 1: sort of gap versus are closest economic competitors developed. It's
Speaker 1: exactly the same thing. It's these institutional aspects, but perhaps
Speaker 1: with a little bit of the globalization process working out
Speaker 1: a little bit differently, So it didn't wouldn't globalizations similarly
Speaker 1: impact Japan and Germany? It does, and it is, but
Speaker 1: and I don't think that's that's the most important part.
Speaker 1: But US companies are more globalized and that has often
Speaker 1: led to more rewards for their CEOs, for for good
Speaker 1: and bad reasons. But I think the most important part
Speaker 1: is what's going on with the social norms and what's
Speaker 1: acceptable for CEOs to be paid. So Germany and Japan
Speaker 1: are very modern economies in many ways, but they still
Speaker 1: have a sort of a corporative culture leftover, and that's
Speaker 1: got some costs, but it also creates a more cohesive
Speaker 1: internal organization for many structures, and it imposes that, you know,
Speaker 1: a rising tide should lift all boats, at least within
Speaker 1: the company. So you cannot have the workers using their
Speaker 1: wages and jobs and masses while the CEOs are getting
Speaker 1: tens of millions of dollars of bonuses, and that's totally
Speaker 1: acceptable in the United States. Let's talk a little bit
Speaker 1: about technology. You wrote on robots and jobs. Evidence from
Speaker 1: US labor market. An analysis that looked at the effect
Speaker 1: of the increased use of industrial robots between and two
Speaker 1: thousand and seven on on the labor markets. What did
Speaker 1: you find? Summarizing it briefly, I would say we found
Speaker 1: that more robots is associated with lower employment and lower
Speaker 1: wages in the local labor market. The effects are not enormous,
Speaker 1: meaning that we're not talking millions of people losing their
Speaker 1: jobs or anything like that, but they are also large
Speaker 1: if you look at it from the viewpoint of what
Speaker 1: does the stock of robots that we have imply, And
Speaker 1: roughly speaking, what we are finding is something like one
Speaker 1: more robot is leading to the loss of jobs but
Speaker 1: between three to six workers in the local labor market. Now,
Speaker 1: that's not a huge effect because we don't have that
Speaker 1: many robots, but projecting it in the future, we have
Speaker 1: to be quite aware that we are going to be
Speaker 1: facing both great opportunities because these robots and artificially intelligence
Speaker 1: technologies are going to increase productivity, but huge challenges also.
Speaker 1: So let's not talk about robots a second. I want
Speaker 1: to talk about software and technology. I run a small
Speaker 1: office where fourteen people, and I know based on my
Speaker 1: experience at firms ten and twenty years ago. What we
Speaker 1: managed to do with fourteen people it would have taken
Speaker 1: fifty or a hundred people twenty years ago. Everything from
Speaker 1: the content we generate to the sort of tax loss
Speaker 1: harvesting and portfolio rebalance you push a button today that
Speaker 1: used to be for accountants in green ice shades working
Speaker 1: for a week to get all that done. How significant.
Speaker 1: Let me let me phrase that differently. Is the fear
Speaker 1: that technology is going to take all our jobs away
Speaker 1: unfounded or is there a genuine reason to be concerned?
Speaker 1: Yes and no. So let me put it this way.
Speaker 1: Let me first start with the yes part, which is
Speaker 1: that people are somewhat complacent about what the future of
Speaker 1: the labor market will look like. And that's for two reasons.
Speaker 1: The first one is that we are told, and with
Speaker 1: good reason, that technology is what brings economic growth, what
Speaker 1: brings prosperity, So why should we be afraid absolutely right. Second,
Speaker 1: there have been economists in the past, some of the
Speaker 1: greatest minds of our profession, who predicted the end of work,
Speaker 1: John Maynard Keynes, the founder of macroeconomics, Leon tv, Herod Simon,
Speaker 1: and they didn't turn out to be right, at least
Speaker 1: in the medium term. So we say, why should it
Speaker 1: be different this time? But I think the truth of
Speaker 1: the matter is that many technologies, and automation technologies and
Speaker 1: parts of software being examples of it as well as
Speaker 1: robots do displace workers. They replace workers and tasks that
Speaker 1: labor was previously performing, and they do it better, they
Speaker 1: do it faster, they do it more cheaply. The reason
Speaker 1: why this doesn't spell doom for the workforce its two folds.
Speaker 1: First of all, at the same time that they do that,
Speaker 1: they reduce costs, and as we become richer, we deploy
Speaker 1: these workers into other sectors. We consume more cars, we
Speaker 1: consume more information, we consume more widgets, and we consume
Speaker 1: more services, and all of these require workers. And secondly,
Speaker 1: we also create new tasks, new jobs, new industries to
Speaker 1: soak up all of the labor that's been freed from
Speaker 1: the task that they were previously performing. So it's a
Speaker 1: good picture on the one hand, but it's a difficult
Speaker 1: picture because it does involve people losing their jobs and
Speaker 1: going through the painful process of reallocation. And sometimes that
Speaker 1: process can be slow, Sometimes that process can be incomplete,
Speaker 1: and I think what we are finding with robots and
Speaker 1: what we are finding with some other automation technologies is
Speaker 1: that those pains of reallocation, and in particular, perhaps because
Speaker 1: these technologies are a little bit more disruptive than other
Speaker 1: ones that we've implemented over the last twenty years, it's
Speaker 1: more painful. Let's talk about your book Why Nations Fail,
Speaker 1: which origins of power, prosperity and poverty. Uh, this is
Speaker 1: really an epic magnum opus which has been wildly received
Speaker 1: and highly regarded. In the book, you talk about institutions,
Speaker 1: institutions institution, as we discussed, You discuss how significant institutions
Speaker 1: are to a robust and well functioning economy. How different
Speaker 1: is this framework for analyzing um economic progress from from
Speaker 1: what preceded anything in science built on the shoulders of giants.
Speaker 1: I think we very much benefited build on the work
Speaker 1: of others. Douglas North, who is a Nobel Prize winner,
Speaker 1: was the first person perhaps to really push this institutional perspective.
Speaker 1: But what we have done is go beyond that, try
Speaker 1: to explain more varied sorts of economic and political relations
Speaker 1: with institutions, be much more systematic about how they work,
Speaker 1: and bring both empirical and historical analysis to further understand
Speaker 1: how these institutional equilibria emerge and why these institutional objectories
Speaker 1: diverge across countries. So define for us what is institutional drift.
Speaker 1: Here we are talking of institutions as the broad organization
Speaker 1: of society. Who has political power, how do you regulate trade,
Speaker 1: how do you enforce property rights, how do course function?
Speaker 1: Who has opportunities in society? And if you look at
Speaker 1: two societies that look very similar at a point in time,
Speaker 1: say go back to the fourteenth century, and observe them
Speaker 1: over decades, perhaps even centuries, what you're going to see
Speaker 1: is that, even though they look similar at a certain
Speaker 1: point in time, they will start drifting apart a little bit.
Speaker 1: You're going to see that they're going to face somewhat
Speaker 1: different challenges, They're going to respond to these challenges a
Speaker 1: little differently, and the nature of the social relation is
Speaker 1: going to look quite different in fifty or one hundred years.
Speaker 1: So you see that, for instance, in the Middle Ages,
Speaker 1: Eastern Europe and Western Europe at some point look very
Speaker 1: differ very similar. They have similar hierarchies, aristocrats and kings,
Speaker 1: and some parliamentary institutions feudal labor relations, cities providing some
Speaker 1: industrial output, and then roll forward one hundred years and
Speaker 1: suddenly you see Western Europe has somewhat bigger cities, merchants
Speaker 1: are a little bit more assertive, feudal relations have just
Speaker 1: slightly eroded relative to Eastern Europe. And then that institutional
Speaker 1: drift comes into contact with a big shock like a
Speaker 1: demographic collapse during the Black Death or new trading or
Speaker 1: political opportunities. And then those societies that have drifted a
Speaker 1: little bit apart suddenly see their trajectories diverged much more radically.
Speaker 1: So let's talk a little bit about the opposite sort
Speaker 1: of question, which is, you're building on the work of
Speaker 1: previous economists who looked at institutions. Where does traditional political science, sociology,
Speaker 1: or economics fail the evaluation of uh poverty and economics.
Speaker 1: We we have persistence, persistent poverty in all sorts of
Speaker 1: places around the world. What do we misunderstanding about those geographies?
Speaker 1: I think understanding poverty is a very difficult question, so
Speaker 1: from a societal From a societal point of view, I mean,
Speaker 1: look at it this way. We live in such great comfort,
Speaker 1: we're uh surrounded by widgets, the hardest type of work
Speaker 1: is gone. We have amazing abundance around us, and then
Speaker 1: we think what's going on in parts of Sub Saharan Africa.
Speaker 1: People have access to income per capita daily income one
Speaker 1: or one eightieth of what we have here. It's just
Speaker 1: so difficult for us to understand how that could exist
Speaker 1: in this globalized, connected, unified world. It is a difficult problem.
Speaker 1: But we have also failed to some degree because we
Speaker 1: have gone after some somewhat facile answers such as geography
Speaker 1: or culture or oh just it's inspired leadership that gets
Speaker 1: out of us out of poverty. And I think the
Speaker 1: truth of the matter is that you really need to
Speaker 1: think much more systematically about what opportunities people have, what
Speaker 1: incentives they have to use those opportunities, and then that's
Speaker 1: going to bring you to these institutional equilibria that we've
Speaker 1: already talked about briefly. Why our economic institutions different, why
Speaker 1: political institutions are different. Why is it that people in
Speaker 1: Sierra Leone or Chat or the Central African Republic don't
Speaker 1: have those opportunities? Why don't they try to create those opportunities?
Speaker 1: And you see there, you really need to get into
Speaker 1: the d tales of these political equilibria. Who has political power,
Speaker 1: what do they benefit from? How is it that they
Speaker 1: can to get away with creating wealth for themselves and
Speaker 1: poverty for millions. So let's talk about extractive institutions. What
Speaker 1: are extractive institutions and how do they differ from the
Speaker 1: traditional rent seeking epithet we've seen tossed about. So what
Speaker 1: I just described a second ago without using the term,
Speaker 1: were the extractive institutions. Extractive institutions are any institutional arrangement
Speaker 1: that enable a group of people to extract resources directly
Speaker 1: or indirectly from the rest of society, and they do
Speaker 1: so by creating a tilted playing field, by destroying opportunities
Speaker 1: and by destroying incentives for the rest of society. So
Speaker 1: it is similar to what people talk of rent seeking,
Speaker 1: but it's broader because when you toko rent seeking, you
Speaker 1: you're thinking of corruption and what government officials do or
Speaker 1: sometimes what some businesses might do in with the politicians,
Speaker 1: as in the chronic capitalism. But extractive institutions, by putting
Speaker 1: the emphasis on this opportunity incentive and the tilted playing field,
Speaker 1: brings out the parallels between say a system like what
Speaker 1: you had in Egypt under Wabarek, where every businessman had
Speaker 1: to be connected to his m DP party and give
Speaker 1: him kick bads to say, feudal Europe where you don't
Speaker 1: have corruption. You don't have any one of those things,
Speaker 1: but you have a system that makes people servile, labor
Speaker 1: produce under coercion, and the benefits go to a well
Speaker 1: defined group of people. You discuss equality in terms of
Speaker 1: political power, opportunity and economic outcomes. Does more equality always
Speaker 1: equal more prosperity. No, because we need the economic system
Speaker 1: to reward success m hm. And that means there will
Speaker 1: have to be some inequality. You cannot success. You cannot
Speaker 1: reward economic success if you pay everybody the same amount,
Speaker 1: And rewarding success means that some families are going to
Speaker 1: do better than others. But what's important is not just
Speaker 1: whether we have equality or inequality of outcomes. That matters,
Speaker 1: and excessive inequality of outcomes could be quite costly for society.
Speaker 1: But what matters much more is whether we have equality
Speaker 1: of opportunity and whether we have political inequality. So by
Speaker 1: inequality or equality of opportunity, I mean the same thing
Speaker 1: as I was referring to with the tilted playing field.
Speaker 1: If you qualify for the best jobs and I don't
Speaker 1: because of my hair color, skin color, social class. That
Speaker 1: means it's inequality of opportunity. Go back to the apartheid
Speaker 1: system under uh in South Africa before it collapse of
Speaker 1: the population Black South Africans. Not only could they not
Speaker 1: go to school high quality school or could they not
Speaker 1: become policeman or politicians or anything like that, but they
Speaker 1: could not perform anyone over over one hundred semi skilled
Speaker 1: or skilled occupations. They couldn't become technicians, they couldn't become teachers,
Speaker 1: they couldn't become formant. So that was an extreme version
Speaker 1: of this tilted playing field, a huge amount of inequality
Speaker 1: of opportunity, but it could take more subtle forms. You know,
Speaker 1: in the United States, everybody is free to do whatever
Speaker 1: they want. But you know, if you grow up an
Speaker 1: inner city and you don't get access to high quality schooling,
Speaker 1: you're not going to be able to be competitive against
Speaker 1: people who go to the best schools. So that's the
Speaker 1: inequality of opportunity. But even more pernicious, it's politically inequality.
Speaker 1: You know, the United States was would as the country
Speaker 1: of the common man. Robert dal a sort of prominent
Speaker 1: political scientist. You know, he asked the question who rules?
Speaker 1: And his answer was the common man rules. That was
Speaker 1: forty five years ago. Today we have a political system
Speaker 1: where the rich are much more vocal than the regular person.
Speaker 1: So politically inequality has crept in. Who do our congressman
Speaker 1: or senators listened to the very rich? Whoever's writing them
Speaker 1: a check? Where he was writing them a check? Who's
Speaker 1: policy positions are reflected in their campaigns, wherever's writing the check,
Speaker 1: wherever is more visible, whoever is more vocal? And I
Speaker 1: think that's the politically inequality we have to watch out against.
Speaker 1: We have been speaking with Professor Darren Asamoglu of m
Speaker 1: I T, author of the book Why Nations Fail. If
Speaker 1: you enjoy this conversation, be sure and check out our
Speaker 1: podcast extras. You can find those at iTunes, Bloomberg dot
Speaker 1: com and SoundCloud. We keep the tape rolling continuing to
Speaker 1: talk about all things economic. Check out my daily column
Speaker 1: on Bloomberg View dot com. Follow me on Twitter at
Speaker 1: ri Halts. If you would like to read any of
Speaker 1: the professors written work, his papers are all available on
Speaker 1: his m I T page. Just google Darren Asamoglul and
Speaker 1: you'll be presented with a wealth of reading opportunity. You
Speaker 1: can also check out his book Why Nations Fail Origins
Speaker 1: of Power, Prosperity and Poverty. I'm Barry H. Halts. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. What could
Speaker 1: your future hold more than you think? Because at Merrill
Speaker 1: Lynch we work with you to create a strategy built
Speaker 1: around your priorities. Visit mL dot com and learn more
Speaker 1: about Merrill Lynch. An affiliated Bank of America. Mery Lynch
Speaker 1: makes available products and services offered by Merrill Lynch Pierce
Speaker 1: Federan Smith Incorporated or registered broker Dealer remember s I PC.
Speaker 1: Welcome to the podcast. Thank you, professor for doing this.
Speaker 1: I've been looking forward to chatting with you for a
Speaker 1: long time. I find your work absolutely intriguing. And I
Speaker 1: didn't say this in the introduction, but I wasn't exaggerating.
Speaker 1: Your CV is literally eighteen pages long. People give me grief.
Speaker 1: I'm like, no, I have a page and a half.
Speaker 1: That's that's a CV. I'm a piker um and I
Speaker 1: you also make all of your papers readily available, which
Speaker 1: not the data does not. Everybody does that. I was
Speaker 1: up late last night reading a run of different um PDFs,
Speaker 1: which I found quite quite interesting. I threw away a
Speaker 1: bunch of questions that we worked a bunch of others.
Speaker 1: I know, I only have you for a finite amount
Speaker 1: of time before you have to run back to the conference.
Speaker 1: But there's some questions I didn't get to that I
Speaker 1: have to ask before I jump into some of my
Speaker 1: standard questions. We we talked about inequality, We talked about technology,
Speaker 1: but we didn't talk about the impact of technology and inequality.
Speaker 1: What does technology mean in terms of increased globalization and
Speaker 1: what does it mean in terms of rising levels of inequality.
Speaker 1: You know, technology is what creates prosperity, but that prosperity
Speaker 1: is not equally distributed. If you look at robots or automation,
Speaker 1: they help some workers much more than others. In particular,
Speaker 1: many of these technologies display certain groups of workers, and
Speaker 1: they're not going to translate into higher earnings for these workers,
Speaker 1: while the managers are the more skilled workers who are
Speaker 1: being complemented by these technologies are going to be the winners.
Speaker 1: So economists talk skill biased technological change, and that's what
Speaker 1: we have experienced over the last sixty seventy years in
Speaker 1: terms of the effects of technology. That's not to say
Speaker 1: that all of the increasing equality in the United States
Speaker 1: is an outcome of technology. I don't think you can
Speaker 1: explain why the top zero point one percent is doing
Speaker 1: so well just by technology, But a lot of it
Speaker 1: is really a technological phenomenon. So you mentioned the top
Speaker 1: zero point one percent. I love this UH data set
Speaker 1: I pulled from one of your pieces. You wrote, the
Speaker 1: zero point one percent in the United States accounts for
Speaker 1: eight percent of the national income. In other countries that's
Speaker 1: more like one or two percent, and in the nineteen
Speaker 1: fifties in the US it was more like three pc.
Speaker 1: So how did the top point one percent capture so
Speaker 1: much of the national income? Is that a function of
Speaker 1: tax policies, at a function of UM stock options? What
Speaker 1: accounts for the tripling of income captured by UM that
Speaker 1: zero point one percent of the population, all of the above,
Speaker 1: it's a huge phenomenon and its consequences are really transformative.
Speaker 1: The occupy movement, the Tea Party, what's going on right
Speaker 1: now with all sorts of populism. I think they're all
Speaker 1: related around the world, around the world than in the
Speaker 1: United States. They're all related to this feeling and it's
Speaker 1: the reality also that the pie is being distributed more
Speaker 1: and more unequally. And when we look at that top
Speaker 1: point top zero point one percent, technology has played at all.
Speaker 1: But I think changing institutions, changing tax policy, and changing
Speaker 1: social norms are very important. Also, we talked about CEOs.
Speaker 1: It's not just that CEOs are so much more productive
Speaker 1: today than they were twenty five years ago, but it's
Speaker 1: become more acceptable for them to be paid huge stock
Speaker 1: options and especially being paid huge sums while they're laying
Speaker 1: off workers are cutting wages at the bottom of their organization.
Speaker 1: So another data point I pulled from one of your papers,
Speaker 1: not so much about the point one percent, but generally
Speaker 1: about the widening inequality gap. You wrote, um, the gap
Speaker 1: between relatively high earners meaning nine percentile of income distribution
Speaker 1: versus the bottom ten percentile has widened. Also, same factors
Speaker 1: driving that gap question. You're not talking CEO is necessarily,
Speaker 1: but you're talking professional class top ten percent a little
Speaker 1: different than than that one or or point one. I
Speaker 1: think the same factors, but they're relative importance would be different.
Speaker 1: I think technology is really the dominant factor when we
Speaker 1: are thinking about, say the workers at the shop floor
Speaker 1: versus the technicians. Engineers are the middle managers. So back
Speaker 1: to your institutional focus. Clearly, technical skills, high end education
Speaker 1: is going to make a big difference in those sort
Speaker 1: of folks, obviously, and I think part of it is
Speaker 1: that we have to run faster in terms of upgrading
Speaker 1: our skills, creating the skills for the new age. Otherwise
Speaker 1: the bottom is not going to benefit. That's a across
Speaker 1: the entire economic strata. Everybody has to move. Absolutely, we
Speaker 1: have to be more flexible, we have to be more adaptable.
Speaker 1: This was really fascinating quote. Um, and a lot of
Speaker 1: this comes This is going to come back to a
Speaker 1: lot of the same answers, but the quote is so interesting.
Speaker 1: The quest for general laws of capitalism is misguided because
Speaker 1: it ignores the key forces shaping how an economy functions, namely,
Speaker 1: how the gains from various different economic arrangements are distributed.
Speaker 1: So when you talk about the quest for general laws
Speaker 1: of capitalism, what you're really saying is it's not the
Speaker 1: input that matters, it's the output that's so significant, right, absolutely,
Speaker 1: And I think again this goes back to social scientists
Speaker 1: desire to simplify things, and we always seek to find commonalities,
Speaker 1: and that's great, but sometimes we see commonalities where non exist.
Speaker 1: So there is this effort to find some general trends
Speaker 1: and ways in which all capitalist economies function, and I
Speaker 1: think that's so misguided at some level. You know, look
Speaker 1: at Egypt. I think under Mubile, Egypt is a private
Speaker 1: ownership economy. There are capitalists. They own the firms, They
Speaker 1: act in profit profit maximizing man or labor markets. You know,
Speaker 1: people uh decide how much to pay for the workers
Speaker 1: that they hire. But the Egyptian economy has so little
Speaker 1: in common with the United States. I would say it
Speaker 1: has much more in common with North Korea. So that's
Speaker 1: why I think this sort of looking for general laws
Speaker 1: of capitalism is a misguided activity. So let's jump into
Speaker 1: some of my favorite questions. I ask all my guests, Um,
Speaker 1: your background. You pretty much went from l C to M.
Speaker 1: I T you've been in academia your whole career. Yeah,
Speaker 1: no real job. Any thoughts on ever leaving academia or
Speaker 1: is that your home for the foreseeable future. I like
Speaker 1: what I do I or what I do? I mean,
Speaker 1: I can't. I would have never thought people would be
Speaker 1: paying me good money for investigating things I find interesting
Speaker 1: and sharing my thoughts. Now most people do that over
Speaker 1: a glass of beer. Right that that sounds like a
Speaker 1: fun a fun job. Let's talk about some of your
Speaker 1: early mentors. Who who are the people who influenced your
Speaker 1: thinking when you were first beginning your career. Many people
Speaker 1: shaped the way I think about it. But you know,
Speaker 1: perhaps it's my character, Perhaps it's the topics that I
Speaker 1: focused on. I did not strictly follow anybody. So if
Speaker 1: you look at you know, people I found inspiring. You
Speaker 1: know Bob Solo, who was a Nobel Prize winner thinking
Speaker 1: about economics, economics, his work was fugially influential. But I
Speaker 1: went in a very different direction. Uh. Bank Homstrom, who
Speaker 1: was an early mentor for me, who was the Nobel
Speaker 1: Prize winner this year, and it's a good friend of mine.
Speaker 1: You know, I found it very inspiring both his approach,
Speaker 1: but but I approached things is very differently uh than
Speaker 1: he did, and went in a very different direction. You know,
Speaker 1: when I started thinking of the bigger picture questions, you know,
Speaker 1: I read Jared Diamonds, Couns, Germs and Steel. I thought
Speaker 1: that was spell bounding, you know, it's was he was
Speaker 1: so good at bringing different pieces of information on the
Speaker 1: table and making it interesting, and I very much try
Speaker 1: to emulate that, you know, James Robinson and I when
Speaker 1: we wrote Why Nations fairly said, well, we're gonna try
Speaker 1: to learn from Jared, But at the end of the day,
Speaker 1: our thesis is so different from Jared. We were triggered
Speaker 1: to write the book in some sense because we have
Speaker 1: a very different story to tell. So in some sense,
Speaker 1: my mentors are often the people I sort of learned
Speaker 1: from but moved away from all push back against or
Speaker 1: or or head in a different direction. Who's influencing you
Speaker 1: thinking today? Oh, that's a difficult question. That is a
Speaker 1: difficult question, isn't it. Economics is a very broad and
Speaker 1: doesn't It doesn't have to be economics. It could be
Speaker 1: any subject, anybody making you think about whatever. Well, you
Speaker 1: know in economics, often people who make me think differently
Speaker 1: are the people I work with closely, you know, in
Speaker 1: the context of technology. For instance, I've been working on
Speaker 1: and off with my colleague David Otter, and I've learned
Speaker 1: so much from him in terms of thinking about the
Speaker 1: role of technology and how it affects different tasks and
Speaker 1: different types of workers, but also on the political aspects,
Speaker 1: sort of bringing the politics and the economics together. You know,
Speaker 1: I have for a long time being building on the
Speaker 1: work that Dog North did, as I mentioned, but for instance,
Speaker 1: his collaborator Barry weinast very much, you know, when we
Speaker 1: Whenever I turn to a different area, I see Barry
Speaker 1: has also written on that. Again I differ from him
Speaker 1: in many ways, but it's always influential and fascinating. Let's
Speaker 1: let's talk about authors, not again, not necessarily economics. What books,
Speaker 1: what authors influencial? You mentioned um, guns, germs and steals, steal.
Speaker 1: What other books did you find especially interesting, worthwhile or influential?
Speaker 1: You know, early on, I think I started reading a
Speaker 1: lot of the history of how the Western world was shaped,
Speaker 1: and many of the authors who sort of tried to
Speaker 1: capture that in a broad social science framework were hugely
Speaker 1: influential on me. Fernand Brodell Mark Block, the sort of
Speaker 1: French historians, and then again Douglas North and his collaborator
Speaker 1: Robert Thomas. In all of these instances I found what
Speaker 1: they did fascinating but also insufficient. So I try to
Speaker 1: sort of build and and move away from them in
Speaker 1: some sense. But Also, you know, many authors who have
Speaker 1: written beyond uh you know, the social sciences have been
Speaker 1: hugely influential. Uh. You know, more most recently, I've enjoyed
Speaker 1: Paul Loster and Hilary Montell's recent books. But uh, I
Speaker 1: always find sort of different approaches to literature as inspiring
Speaker 1: as as reading the history or the economics of it. So,
Speaker 1: since you've joined the world of economics, what has been
Speaker 1: the sea changes? What are the major shifts that took
Speaker 1: place that are are noteworthy, especially in your space? Obviously
Speaker 1: Picketty's publication was one. What what else do you think
Speaker 1: is a well too? That I would mention that I
Speaker 1: think are much more deep rooted and will have longer
Speaker 1: run effects on economics. Is and this is of course
Speaker 1: from my vantage point, the importance of institutions. You know,
Speaker 1: it's not again that people didn't realize institutional factors matter,
Speaker 1: but it's now become such an inseparable, vital part of economics,
Speaker 1: political economy. How institutions context determines how different technological, demographic,
Speaker 1: and other factors impact the economy. I think that's now
Speaker 1: second nature to many economists. Second, technology, you know, for
Speaker 1: a long time we thought of technology as just a
Speaker 1: fairly uniform process. It improves productivity, it then leads to
Speaker 1: higher wages. And now we are seeing that technology does
Speaker 1: lots of good things but creates lots of challenges, also
Speaker 1: displacing workers, creating unemployment, sometimes reducing wages, increasing inequality, creating
Speaker 1: hugely costly, socially difficult adjustment processes. And I think in
Speaker 1: the next twenty years we're going to see both more
Speaker 1: of that. But as an economics profession of social science,
Speaker 1: we're also going to get much deeper into it. So
Speaker 1: the coming shifts are more focused on institutions, more focused
Speaker 1: on technology, anything else. We haven't really noticed what what's
Speaker 1: going to surprise us in the next few decades that
Speaker 1: I'm really asking what what shift is coming that people
Speaker 1: haven't really given a lot of thought to organizations. I
Speaker 1: think we are going to see very different organizations, and
Speaker 1: how organizations are able or are not able to change
Speaker 1: is going to be a crucial factor in our ability
Speaker 1: to use technology to create prosperity. Organizational economics has been
Speaker 1: another growth area within economics, but I think the challenge
Speaker 1: of understanding how organizations are able to recreate, reshape themselves
Speaker 1: in the face of technology that's an area we have
Speaker 1: to be much more serious about. So the next few
Speaker 1: questions comes from leaders and listeners. We get these on occasion.
Speaker 1: Tell us about a time you failed, what did you
Speaker 1: learn from the experience, and how different was that experience
Speaker 1: in terms of learning than a than a success. Well,
Speaker 1: I mean, my beginning and the economics profession was just
Speaker 1: a huge failure. I came out of the PhD program
Speaker 1: at the Landon School of Economics, and and I thought
Speaker 1: I could just take my PhD dissertation and all of
Speaker 1: my ideas and write them as papers and published them
Speaker 1: in good places. And I tried that, and then one
Speaker 1: rejection after another, and then I realized I wasn't ready,
Speaker 1: that I wasn't, you know, writing just the right way.
Speaker 1: I had to improve my exposition. And some of my
Speaker 1: ideas were I think, still not bad because they became
Speaker 1: the basis of a lot of the more influential work
Speaker 1: that I did later, But they weren't They weren't totally
Speaker 1: accepted at the time, and I wasn't making the right
Speaker 1: effort to uh to to make them presentable and understandable
Speaker 1: for the for the audience. So I came close to saying, look,
Speaker 1: I'm gonna throw in the towel. It's been like three
Speaker 1: years since my PhD. I'm still not getting going anywhere.
Speaker 1: But then the problem was with me. The failure was
Speaker 1: largely my fault, and I learned, and then once that
Speaker 1: learning was partly done, I was able to improve myself,
Speaker 1: my research, and my ability to appeal and communicate with others.
Speaker 1: What do you do for fun or relaxation outside of
Speaker 1: the office, outside of work? What's the relaxation? You know,
Speaker 1: I have two young boys. They don't allow me to relax,
Speaker 1: but it's fun. Okay, that's a fair, fair enough answer.
Speaker 1: You work with a lot of students, a lot of millennials.
Speaker 1: What sort of advice would you give to someone who
Speaker 1: came to you, uh and said, I'm interested in the
Speaker 1: career in economics? What would you advise them? Be serious
Speaker 1: about it? You know what I mean by that is,
Speaker 1: don't lose your humor or sense of playfulness, but just invest. Invest, invest,
Speaker 1: Learn more history, learn more math, learn more statistics, learn
Speaker 1: more of the context, and try to bring them together.
Speaker 1: Most of the good ideas we have come from synthesizing
Speaker 1: existing lines of thoughts in a new way, And for
Speaker 1: that you really need to have a lot of background
Speaker 1: in many different fields. And I think people often don't
Speaker 1: realize that they specialize in something. They do their homework,
Speaker 1: but they just don't invest in that reservoir of knowledge
Speaker 1: that's going to be necessary for going to the next stage.
Speaker 1: And our final question, what is it that you know
Speaker 1: about economics today that you wish you knew twenty years
Speaker 1: ago when you were first getting started? Boy, I mean,
Speaker 1: I think if I knew the things that I think
Speaker 1: I've found out in the last twenty five years, I
Speaker 1: don't know I what I would have on because first
Speaker 1: of all, there wouldn't have been all this amazement that
Speaker 1: was in front of me that motivated me to to
Speaker 1: to go after them. But of course if I had
Speaker 1: inkling all the things that I sort of discovered later on,
Speaker 1: say ten fifteen years after my sort of after the
Speaker 1: beginning of my career, of course I could have gone
Speaker 1: there much faster. I could have started working on this
Speaker 1: issue of how technology is a much more complex phenomenon
Speaker 1: that displaces workers and creates both the gains and the losses,
Speaker 1: or the sort of institutional equilibria that you know really
Speaker 1: was was there? Part of my interest from the beginning,
Speaker 1: but it really sort of matured over time. But I
Speaker 1: think it would have taken the fun away. I think
Speaker 1: that's struggled at failure, discovering it slowly. That's what really
Speaker 1: sort of made it worthwhile, the journey, not the destiny exactly.
Speaker 1: We have been speaking with Professor Darren Assamoglu of m
Speaker 1: I T, author of the book Why Nations Fail. If
Speaker 1: you enjoyed this conversation, be sure and looked up or
Speaker 1: down an inch on Apple iTunes or on Bloomberg or
Speaker 1: SoundCloud for any of the other hundred and forty seven
Speaker 1: or so such previous conversations. I would be remiss if
Speaker 1: I did not thank Taylor Riggs, my booker and producer,
Speaker 1: Michael bat Nick, my head of research, and Medina Parwana,
Speaker 1: my recording engineer. I'm Barry Rihults. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio. Our world is always moving,
Speaker 1: so with Mery Lynch, you can get access to financial
Speaker 1: guidance online, in person, or through the app. Visit mL
Speaker 1: dot com and learn more about Merrill Lynch. An affiliated
Speaker 1: Bank of America, Merrill Lynch makes available products and services
Speaker 1: offered by Merrill Lynch Pierce Veneran Smith Incorporated or registered
Speaker 1: broker Dealer remember s I PC