Starr Forum: Why Nations Fail

so I'm delighted to welcome you today to the Center for International Studies and this talk by Darren Ajami Lu who is as you know the Elizabeth and James Killian professor of economics at MIT before I turn it over to him I want to I will indeed remind you or inform you that we have a couple of other events among others that may interest you the two I want to mention on November 13th at 6:30 in the evening in Kersh auditorium will be the attack of the drones ethical legal and strategic implications of UAV use and that's with Barry Posen our own Barry Posen Brian hare and Rabia Mahmood with Ken Oh a professor oi moderating should be very interesting and on December 5th at the Media Lab the new building sixth floor James Fallows will be here to speak about China two really good events and I hope you can come I read this book Why nations fail the origins of power prosperity and poverty over the summer and I immediately asked Michelle nooch our director of public programs to schedule this talk and I recommend this book to you very highly I mean this is one of the rare cases I think of not so rare and perhaps but but unusual cases of important cutting-edge social science research applied to today's complex problems and innate extremely enlightening and entertaining even I would say form this is a very well-written very compelling book to read lots and lots and lots of ideas and as I hope we'll get into in a little while very relevant to just about everything that's on the table in the United States and elsewhere with respect to development and economics politics and so on so we're really delighted to have Darren here today I won't go into a long introduction he's been at MIT for many years he got his PhD at London School of Economics he's had many awards and honors including their urban Klein Nemours prize and several for his previous book with James Robinson economic origins of dictatorship and democracy written about published six years ago he will speak for about 30 minutes I will ask a couple of questions and then we'll we'll open it up to you until six o'clock so please help me welcome Darren Hodgman thank you very much John and thanks everybody for being here it's a great pleasure to be here at my own institution to talk about why nations fail so I want to give just a brief overview of the argument with some of the implications in particular I'll talk about just the broad ideas and then bring it to the US case which is one of the several implications that we don't actually develop in sufficiently great detail in the book but it's one that people are obviously interested this being the country that many of us live in so the starting question of the book is actually quite a common one in social science what explains the enormous differences in living standards and prosperity around the world this was the question actually that the wealth of nations Adam Smith's treatise that set out the scene for the modern septon of economics asked more than 250 years ago but notably when Adam Smith was writing the gaps between rich and poor nations were actually quite small relative to what they are today to the best of our estimates those were of the order of four or fivefold between the poorest and the richest nations today that is around in the neighborhood of 50 fold between the poorest and richest nations so in our globalized integrated unified world actually the puzzle of why there are such huge gaps in prosperity has become even deeper and of course with such an important questions theories abound some people will argue that Geographic factors natural resources or disease environments or the climate or access to navigable rivers or sea shores are really important and make some nations destined to succeed and others destined to fail others emphasize the importance of culture going back to Max Weber protesting work ethic has been emphasized others in the 20th century have laid a lot of emphasis on judeo-christian values for instance in the context of the Middle East many argued that the Islamic religion was incompatible with democracy or or made these regimes more likely to be dictatorial or in the context of Haiti people have argued that the work ethic there makes it impossible for the nation to succeed and so on and yet others quite popularly actually among economists another social scientist would subscribe to a sort of a view of enlightened leadership so according to this view some nations succeed because they adopt the right policies and they adopt the right policies because they have the right leaders they understood leaders understand what sort of policies or what sort of arrangements will work or perhaps they have the right advisors who give them the right advice and of course that's why economists like it because we often play the role of advisors and of course the economics discipline revolves around the issue of you know us identifying what are market failures and how we can develop clever solutions to them actually the main argument of the book put very simply is that yes policy mistakes or institutional mistakes from the viewpoint of bringing prosperity to a nation are real important but there are not really mistakes people get it wrong but they get it wrong by design and to expand on that let me say a few more things laying the sea so our theory is actually quite simple it's about incentives economic incentives and political incentives and those incentives are shaped by institutions broadly the rules of the game in a society in the economic social and political sphere in the economic sphere we talk of inclusive economic institutions includes of economic institutions are those that exert and force property rights that have judicial and contracting institutions that uphold contracts and enable individuals to enter into mutually beneficial agreements and quite importantly perhaps most importantly they provide a level playing field both in terms of regulations that don't prevent people too from entering into businesses and occupations that are best for themselves in providing the right sort of investments in public infrastructure and education and so on that make it possible for the population at large to participate in the economic game and it's no surprise that I think inclusive economic institutions with these level playing field are really important because if you look at sustained economic growth growth in the long run that lasts not for just a couple of years nor not just for a decade but for extended periods of time it's based on technological change it's based on innovation it's based on creative destruction so any society that only uses the energy and creativity of a small fraction of its population is not going to be significantly prosperous in the long run but the catch is that most societies throughout history or even today aren't ruled by inclusive economic institutions they're ruled by extractive economic institutions that do the opposite they don't create secure property rights at least not for the majority of the population they don't create a legal environment that upholds contracts or they call it a create an environment that's very biased and most of all they create a very tilted playing field where the politically powerful are protected by entry barriers and politically powerful have all the resources and get all the education get all the rights to enter into the lucrative occupations and businesses and of course the word extractive here is not chosen by sort of router's are chosen randomly the idea that we want to communicate is that these institutions aren't there by mistake they have been designed they have been designed for a purpose precisely to reallocate resources redistribute resources from the majority of the population for the benefit of the politically few whom we sometimes refer or often refer to in the book as the elite and the reason why these extractive economic institutions don't support economic growth sustained economic growth is that because they don't generate the sort of innovation they block innovation they block technological change and they don't create a secure property rights and the contracting environment for the majority of the population to take advantage of their talents and skills in fact quite the opposite throughout history they create such a tilted playing field that much of the population is actually coerced for the benefit of the minority slavery feudal labor relations servile labor relations would be example but coercion is actually all around us if you look at history and these extractive economic institutions don't exist in a vacuum they are supported by a specific set of political institutions which for the to emphasize the sort of the symbiotic relationship between the two we call extractive political institutions extractive political institutions are those that concentrate political power in the hands of a narrow elite and don't create political equality they don't create checks and balances or constraints on the exercise of power and you see why these two are going to create feedbacks between the two let's consider a specific example Barbados for example in the 17th century it was one of the richest places in the world at the time based on a sugar economy but that sugar economy was organized around slavery a very clear course of institution a sort of archetypal extractive economic institution but of course if you had political equality in the on the island if everybody had to say about what sort of economic institutions how what sort of distribution of resources was going to prevail people who were the slaves working at sub subsistence levels and all of their out being extracted from that would not have voted for slavery instead of course you didn't have political equality you had an extreme form of political inequality look at judges on the island well the judge ships were dominated by the very top 1% who were the major land holders in society look at the military power well the major Commandant's were were the same families that were to own all the big plantations what about political power well the people who run the island were again the same families and that makes sense of course because if it weren't the same families they would have incentives for changing the economic institutions and together with it the distribution of resources in society what we do in the book is try to explain why is it that extractive and inclusive economic institutions have very different implications for innovation technological change and economic prosperity how they interact with extractive and inclusive political institutions included political institutions being those that create more political equality create the sort of constraints that I've mentioned being lacking in under extractive political institutions and also quite a lot of it is about why is it that institutions persist and under what circumstances they change and what we can say about this process of change and the hope for change under certain circumstances but instead of going through those details what I want to do is I want to go through one specific historical case to illustrate what we really mean by inclusive and extractive institutions and why they emerge in some places and not in others and why I have made the claims that the alternative theory is emphasizing geography culture and enlightened leadership aren't the right places to look at for understanding the bulk of the B's big differences across nations and there is no better lab for thinking about institutions and incentives than the new world the Americas because the institutions in this continent have been shaped by European colonization starting at the end of the 15th century so let's start at the in South America of course the sort of the Americas is also a microcosm for the sort of the huge differences that I have mentioned perhaps we don't see the except for Haiti we don't see the very very poorest countries in this continent but if you look at the South America versus North America you see many cases of tenfold differences in income per capita so why is it that the South is so much poorer so let's start with the colonization of the Southern Cone of of the continent so with the conquistadors that's not who's not as famous as Pizarro and Cortes for reasons you'll see but but no less significant nonetheless and that's Juan Diaz the soleus who in 1516 started the colonization of what is today or Argentina and Uruguay but the soleus did not encounter the Incas or the Aztecs instead he came across bands of very sparsely settled very mobile Indians called the quaran D and the Chihuahuas and the soleus actually had exactly the same sort of approach to colonization as the Pizarro and and Cortez and he was after capturing the Indians putting them to work and hopefully getting them to produce valuable progra cultural products and most importantly extract gold and silver so in fact if you look at the three ships that the soleus took with him it was filled with two sorts of people soldiers because he needed the men power to coerce people and Goldsmith's because he was interested in getting gold however unfortunately there was no gold and even more unfortunately for him the Indians were very difficult to capture being sparsely settled and when they were captured they were unused to hierarchical agricultural work so they refused to work and they fought back and in fact some of them clubbed him to death so it was pretty unfortunate for the soleus and that's why he's not as famous as Pizarro and Cortes but the other Spaniard sort of persevered they were it close to throwing the towel several times many of them starved because they were certainly unprepared too for growing food for themselves despite the fact that actually around the the areas around Borna cyrez the pampas and so on are actually quite quite famous for their agricultural productivity today but the Spaniards weren't planning to grow food themselves and they weren't prepared for it so just as they were coming close to throwing the towel another one of the conquistadors the eye ollas Wanda Ella's sailed up the Parana River from the area to what is today Paraguay asunción and there he encountered another band of Indians the Guarani well the Guarani weren't the Incas or the Aztecs either but they were more somewhat more densely settled and more important they had already developed a sedentary hierarchical structure with their own princes and elite so the Spaniards immediately took over this society they declared themselves as the elite they married some of the princesses they took and adapted the existing labour institutions in particular cores of institutions and they set up a very successful from the viewpoint of the Spaniards colony that became a model for the later colonies so in that context they develop the sort of institutions that would be perfected later on such as the encomienda which was a land grab together with the labor on it so it's a very coercive institution or other labor labor institutions such as the Mita in the department or which were again based on coercion and the coercion is very notable here I keep repeating it because it's sort of emphasized that these economic institutions were supported by a particular type of political power political power militarily at least being very much in the hands of the conquistadors and this economic institutions even though they changed and adapted over time actually lasted quite a long time in much of Latin America and they were they were proved they proved later on to be not the sort of institutions that would encourage industrialization or economic growth in the nineteenth century when many other parts of the world started growing rapidly what about the North now at this point in my tale of course the South is poor the North is rich because that might be because of geography or perhaps it's because of culture after all the North was colonized by the English perhaps with their with their protest and values or perhaps the English were fleeing for their religious freedom so they they set up a very open society well actually the truth is a little more complex than that so for that let's turn to one of the very earliest colonization attempts in the in the north which is a which is the Jamestown Colony led by the Virginia Company a profit maximizing corporation which started in 1607 now Virginia company is very interesting because it was a profit-maximizing corporation letter settle set up in London and very much inspired by the Spanish model they saw the Spanish king and the Spanish conquistadors made all this money and they want it they won and in as well so the shares of the virginia company were being sold because people wanted to invest in this very lucrative business and what was a lucrative business well again it was to go to the Americas find a bunch of people to course to put to work and perhaps get silver and gold and for this reason the Virginia company sent in three ships just like the soleus and the three ships were filled with you guessed it soldiers and Goldsmith's but unfortunately they also had a rude awakening when they arrived there just exactly like the soulless day were they encountered very sparsely settled very mobile very non cooperative hunter-gatherers and repeating the same events they couldn't survive they couldn't grow their own foods they started starving they went through this famous starving time only being sort of kept alive by well according to myth by spread by John Smith himself by jump some its ingenuity but so be it after a while the Virginia company realized that this is not a going to be a good model so they started looking for an alternative but unfortunately for them they didn't have the option of sailing up the Parana River and finding another more densely settled set a sedentary population that they could dominate so that option wasn't open to them so they came up with another possibility they said well if we cannot incur a capture and and put to work they in the local population we can bring our own lower strata as indentured servants and we the elite of the Virginia Company the governors and and and and the officers would live off them and then the Virginia company's shareholders themselves would make money so they brought a bunch of indentured servants also called settlers they weren't quite settling at this point voluntarily but but that was going to be that turned out to be not so successful either but before I tell you about why that wasn't successful let me read from the laws that Sir Thomas Gates the governor and Sir Thomas Dale the deputy governor passed at this time so the laws read like this no man or woman shall run away from the colony to the Indians upon pain of that anybody who robs a garden public or or a vineyard or who steals ears of corn shall be punished with death no member of the colony who will sell or give any commodity to date of this country to a captain Mariner master or sailor to transport out of the colony or for his private use upon pain of death now you realize two things from this first of all this was no happy shiny colony where people loved each other and lived consensually but secondly there was actually something quite real that the virginia company was afraid of people running away because these settlers were the resource that they were going to use to enrich themselves if these settlers either if they trade it on their own behalf or if they ran away to the Indians which dated quite often because the living conditions were awful that they wouldn't be able to exploit those resources though so the extractive strategy wouldn't work and at the end they threatened death they employ they executed people but it didn't work so after a short while the Virginia Company threw in the towel on this one as well so their second strategy was a failure to so what did the Virginia Company do so at this point they came up with a third strategy a totally different one they said okay fine coercing the Indians or coercing the settlers doesn't work so we'll try something else will try to give incentives to the settlers so they came up with the headright system which essentially meant to give each settler a plot of land and secure property rights and tell them you can grow whatever you crop you want here and you should you know this is your own land you should do the right investments and you can sell it to whoever you want and this is going to be the system from now on now it's all well and good but there's only one catch it was just one year ago that Sir Thomas Gates and Sir Thomas Dale were threatening anybody who traded an ear of corn with death now they're telling you okay now we're going to enforce your property rights and you're totally secure so you wouldn't be yeah you wouldn't be recused of being totally paranoid if you didn't trust them fully so in 1618 the headright system came but it was followed by even a more important innovation in one year later in 1619 when the Virginia Company said okay fine we're now going to transfer political power to you so they introduced general assembly where all men would now decide the political direction of the colony and in the same way that the institutions that immersion with the Guarani and they with the Aztecs and the Incas persisted and were the basis of of the economic institutions of Latin America those in those that started in Jamestown Colony and were repeated actually with a sequence of events that were very similar in the Carolinas and in Maryland persisted and were the basis of the 19th and 20th century American institutions now at this point it's also useful to go back and think about well you know how can we explain or how can we account for this divergence between South and North America let's go back to the sort of the alternative theories first about geography well was there anything geographically different between the south and the north I'm sure there were many differences but it doesn't seem like those differences were really that important in explaining this divergence it wasn't as if the area's conquered by areas occupied by the Aztecs or the Incas were agriculturally so different and non productive unproductive that it they were destined to fail while the North was destined to success in fact the opposite at the time that the English and the Spaniards arrived the richer more civilized more complex society supporting denser populations were in what is today Peru Bolivia Mexico and so on so on the basis of just pure agricultural productivity if that's what you thought was the main determinant of economic success you would expect those places to continue to be successful but of course what we have seen is that those places have failed economically and they failed precisely because they had very large populations and those large very large populations enable the Europeans to set up the sort of colonies that they intended to what about culture well culture doesn't go very far either sure of course the people in the North were protesting sand those in the South were Catholic some spoke Spanish some spoke English but actually the culture was quite secondary the strategy of colonization their way of going back outed their objectives all of these were very impaired allel the virginia company may have been led by a protest ins but their what they were trying to do were very similar and the same thing applies to enlightened leadership it's not as if you know the leaders of virginia company were so enlightened that they saw that one set of economic institutions was going to bring economic prosperity in two hundred years in fact the opposite the leaders of virginia company especially Sir Thomas Gates and Sir Thomas Dale failed they weren't quite enlightened they were unsuccessful in getting the sort of institutions that they wanted it was the conquistadors like Pizarro and Cortes and they ollas who succeeded so instead the difference lies in in the set of institutions that emerge those institutions emerge because there was a particular type of conflict between the elite the conquistadors or the Virginia companies elites and the population on the ground in one case that conflict led to the establishment of extractive institutions that persisted in the other case that conflict resulted in the emergence of more inclusive institutions that became stronger over time so crucially we have to understand institutions but also we really have to think of the politics of institutions it is deeply political because in both cases there were different models but these different models benefited different sets of players the economic and political institutions that the conquistadors were successful in imposing weren't the only possibility but they were the possibility that they themselves would benefit from and they were successful militarily successful and the conditions were conducive to their success and they were able to actually install and develop these extractive institutions in the north those institutions failed and out of their ashes came the inclusive institutions so we have to think about this process of economic and political conflict how it resolves and how it leads to the emergence of one set of institutions versus another we also have to think about how is it that once a particular set of institutions are in place they persist so I'm not going to have time the time to talk about that now but of course the encomienda or the Mita have long disappeared but we really have a path dependent process of institutional development once you have a particular set of institutions they are not forever and they are not destiny but they do have a powerful impact on the path of development of institutions over time and that's why we cannot understand why when entirely new set of people not the sons of conquistadors came to power for example in the 19th century in Mexico they were much more willing and able to set up other extractive institutions or favor their own friends instead of creating an inclusive environment that was open to economic activity by the broad majority of the population but instead what I'm going to do is I'm going to talk a little bit more about the United States and bring the story of the United States to the present and in the process emphasize both how inclusive institutions work and also the threats to inclusive institutions in other words instead of talking about what we spend quite a bit of time in the book which is the process via which you transform extractive institutions into inclusive ones I want to talk a little bit about the dangers of inclusive institutions turning into extractive ones so let's first of all talk about the United States how did the United States become rich well if you think about it the United States became rich in the 19th century before the 19th century you know the estimates differ but United States wasn't you know so much more prosperous than many parts of South America for example Mexico but in the 19th century United States became rapidly industrialized it became industrialized through a process of innovation and technological change and investment and how was this investment driven who were the key entrepreneurs that's where the remarkable thing is first of all United States just like Britain and some few other economies had a much more secure set of property rights the patent system for example which encourage innovations in the United States was just the tip of that iceberg but was very important because of its symbolic value it enabled people from all walks of life to be able to say ok this is my invention and I will be able to to market it or I will be able to open a business on the basis of it and scale it up and the patterns are also useful because they give us a trail of who the big innovators of the 19th century were and when you look at it the majority of these innovators weren't sons of established families or they didn't even come from rich families they weren't even sons of daughters were rare at the time for other reasons they weren't even from families that that that were industrialists themselves they were literally new men and what enabled these new men you know Thomas Edison but but many others to be so successful was a the patent system but B also their belief that once they came out with an invention they would be able to produce scale up using the labor market enter into contracts with other businesses and also expand their businesses in whatever direction was profitable and that process worked reasonably well in the United States and led to rapid growth in many industries and United States became the technological leader but by this I don't mean to imply that United States was a perfect society far from it throughout this period United States was ruled by partly inclusive partly extractive institutions while the early stages of that industrialization were underway powerful the United States was under slavery the south another example of extremely extractive institutions even after slavery was formally abolished it was replaced by Jim Crow and other gamete of institutions in the south that prevented people from choosing their occupations or especially african-americans from being able to enter into occupations or obtain education or even politically participate participate in the political process but what was important is that in each case US institutions were flexible enough and open enough and that again due to their broadly inclusive nature to rise to the challenges albeit slowly so the Jim Crow institutions lasted for several decades but they didn't last forever and they crumble during the civil rights era there was there were other threats to the inclusivity of us institutions for example during and after in the aftermath of the Gilded Age when income inequality became huge in the United States and political inequality started emerging along the same lines of income inequality but that led to a political movement first the populist and then the progressives that campaigned exactly on creating a more level playing field and was successful in doing so both on the political and the economic side but I think that also highlights some of the issues that are at the root of the long-run failure of extractive institutions what was quite important for the United States in the 19th century is that even when there were periods in which economic inequality and political inequality increased political power wasn't so monopolized in the hands of a narrow group that they could call all the shots and block innovation block technological change block new investments that threaten them contrast that for to other countries for example let me give you two examples from the 19th century again but this time from Eastern Europe austria-hungary and Russia well while the United States was industrializing building railways building factories coming up with new innovations while the same thing was going on in the United Kingdom and in France and later on in Germany nothing of the sort happened in austria-hungary or Russia why not well in Russia or in let me start with Austrian austria-hungary for example Frances the first was in power as an absolute Emperor and he was very strongly opposed to industry he was very strongly opposed to railways because he saw industry and railways as destabilizing forces if you allowed factories to be built this would create a new class of wealthy man who would then start making political demands he didn't want that more troubling Frances the first like many more Arthur in that area during that era was very scared by the specter of 1848 so the last thing he wanted was workers congregate in factories and in cities which he thought would be very destabilizing for the society and so he didn't he was he did not allow factories being built railways for the same reason he was very much against railways railways would encourage people to mingle to travel to trade and that again he thought would destabilize it all of these were clearly things that would contribute to Austria Hungarian economy but Frances the first with the elites around him blocked it the same thing happened in Russia Nicolai the first had exactly the same view of factory and railways as as Frances the first and he also blocked it in Russia however after the Crimean War when Russia was defeated by the French British and the Ottoman Empire there was an about-face they said well for our in turn international power we have to have railways when we have to have armaments and we have to have factories under our X and the second a rapid process of industrialization and railway building came and you know that led to the stability that Nicolai the first and Frances the first were afraid first to 1905 and the 1917 so these when these men weren't irrational but they were making a calculation based on their wish to keep the existing regime in power so what enabled the United States to become such a powerhouse in industry technology innovation was that they did not have the political power concentrated in the hands of Francis the first or Nikolai the first or anybody like that who could monopolize it but there in I think lies the dangers that US institutions today face at some level we are in the middle of a perfect institutional storm and we are in a will face of a perfect institutional storm because we know that inclusive institutions can turn into extractive ones when political power becomes concentrated in the hands of a very small minority just like Nicolai the first or Francis the first and perhaps a cautionary tale here is Venice Venice probably based on some of the most inclusive institutions at the time became one of the richest places in the world in the 10th century this was indeed based on inclusive political institutions because Venice had a system of political participation that essentially all merchant families to be represented in the dookle Council in the Great Council and in fact if you look at the records you see that over 80% of the people who were represented were entirely new men again not the sons of established tram elite and that created a much more inclusive political environment and on the basis of this it also had much more inclusive economic institutions than other places around the time it created secured property rights and profit incentives for the merchants but also quite importantly it created very innovative contracts one of them was called the commenda which enabled risk-taking to take place in a very open manner for instance it enabled people without capital these new men to enter into a profit sharing arrangement with people with capital saw that they could enter into the lucrative business line so they wouldn't be monopolized by just in the hands of a few families who control the resources in Venice but in the end of the 13th century things started to change especially a group of established families said why do we have to share political power with all of these newcomers and why do we have to share economic opportunities with these newcomers if we could only monopolize these economic approaches we can make even more money we can become even more powerful we can even we can have even greater status so they engineered a political revolution or a counter-revolution in which they started monopolizing power and in particular they closed the ducal castle and the great council to new families from now on for and in particular after 1315 there was a list the golden book of families who could be represented in these bodies and anybody who wasn't in these in this list couldn't become part of the ruling ruling families so from then on the 80% of new men were out but perhaps ominously for what we are going through now the political inequality quickly translated into economic inequality so soon the same family started monopolizing trade and they even banned the commenda which was so important for the riches of Venice but it made a lot of sense from their own perspective not to society's perspective from their own perspective to ban the commander because commander was one of the channels through which new people without the capital could come and compete with them in their businesses so what is the reason why I'm saying the u.s. is in the middle of a perfect institutional storm well because I think there are many changes many of them having their origins in disparate places that are created economic and political inequality in the United States I think the first one is technological change and globalization that have been at the root of a very large increase in inequality in the United States if you look at US income distribution or wage distribution from the 1950s 1960s and early 1970s what you see is this kind of classic picture of a rising tide lifting all boats everybody in the distribution is have is experiencing their wages increase in tandem and then from 90s late 1970s to today you see a huge fanning out of the weight distribution the bottom is falling out sometimes recovering but sometimes going even worse the middle is more or less stationary and the top keeps on increasing things are even worse at the very top if you look at the the very very wealthy say for example the top 1% or you can go even further and you can look at top 0 10.1% but let me focus on the top 1% their share hovered around 10% in the 60s and the 70s if you look at the 19th century we don't have great data but in all likelihood it was even less than 10% before the Gilded Age when the robber barons and the and a handful of very powerful families became very very wealthy after the 1970s that share of the top 1% in national income keeps on increasing and today it's you know way past 20% coming close to 25% so there's a huge inequality at the very top with a small group of families becoming very very wealthy and there is a much greater inequality opening up in the rest of the of the distribution now a lot of that has its origin as I said in technological change in globalization but some of it is also institutional many of the institutional arrangements in the United States such as unions and minimum wages that you know perhaps created some economic in efficiencies but also limited the extent of inequality including social norms of fairness and other things have disappeared and as a result you see this inequality opening up in many different parts of the society well you can say what's wrong with inequality doesn't inequality provide incentives for Entrepreneurship you know there is some of that but there is another danger to inequality which is that when economic inequality increases that naturally translates into political inequality the the sort of the cycle in Venice was politically inequality - economic inequality and political inequality and that's what opened the way to the big reversal in institutions so there's a real danger that United States is becoming more politically unequal and that sort of economic inequality creates another danger as well when you have economic inequality it also opens the way to the bed sort of populism thus order that Chavez for example exercises or exhibits in in Venezuela where on the basis of the discontent created by this sort of unfair inequality you get political support for dismantling secure property rights or the market institutions that are important for economic growth and innovation but that's not the only thing that's going on in the United States that's cause for concern I think another one is our educational institutions part of the reason why inequality is increasing so much is because educational institutions in the United States haven't been as successful as they were the United States became rich in the 19th century not only on the basis of patterns but also on the basis of being the country that was ahead of everybody else in terms of investing in human capital but if you look at the data it's much less much less optimistic at the moment sure we still have institutions like MIT Stanford Carnegie Mellon Caltech which are you know great places for engineering and innovation but overall if you look at for example male college completion rates they've been declining or stationary for the last four decades so we are still below where we were at the end of the 1960's if you look at high school completion rate we are barely about where we were in the 1960s and of course on top of it the quality of high schools may be failing and the quality of colleges may be failing as shown by international test scores third money in politics now if there was greater economic inequality that would be one thing to sort of say well economic inequality is unfair or is problematic but we have been able to firewall it and it doesn't affect politics but I think most people think and fairly so that money has been playing much more of a role in politics well this might also have some exogenous courses perhaps the modern political campaigns are much more money intensive than they were but whatever the cause is I think there is a lot of evidence suggesting that money matters much more in politics and as money matters much more in politics politicians listen much more to the very wealthy and are influenced much more to the very wealthy our patent system the patent system that was so important for example in underpinning the in technological change in the 19th century has if anything become an impediment to economic growth so patents are now a barrier to entry against many companies as experienced by as we as illustrated by the fact that you know companies are being bought and sold not for their ideas not for their productive capacity but for their patent treasures and finally I think although this is far from the expertise of an economist like myself to talk about I think the war on terror and the general environment that that has created is also important because if you look at the Gilded Age which is perhaps a model for what we're going through right now greater economic inequality a number of families becoming fabulously wealthy at the end have a fundamental durable effect on us inclusive political institutions why because these institutions were sufficiently open to create dissent journalists and people organizing forming movements and criticizing the robber barons and the politicians who were in their pockets well with the war on terror perhaps we are less able to do so and it is actually quite important that you know if we go back to Venice as a model Venice actually did not have a professional police force during its inclusive days it only introduced a political professional police force at the end of the 13th century after the process of closure started and that political police force became increasingly repressive why well when political power was more equally distributed you didn't need the political police force to silence people well but when the political power was concentrated in the hands of a few people then the political for the police force became much more important as a way of maintaining that status quo with all of these things I think which create what I said the perfect institutional storm I think I am still you know mildly optimistic about the United States and I think that's something we can talk about more but I think I'm mildly optimistic because at the end even though inequality has increased even though there is money in politics US political system is not dominated by bust one interest it's not dominated by finance it's not dominated by software it's not dominated by steel it's not dominated just by the politicians so there if there is enough openness and even with the war on terror and the new sort of intolerance to descend a lot of people are still vocal and talking about it and perhaps the Internet makes it much easier for us to talk about these things but I think even if you are optimistic I think the sort of perspective that we try to develop suggest that you should we should never take inclusive political institutions and includes of economic institutions for granted they are very important for the long-run prosperity of a nation but they're also our collective choices and if we let them go to pieces they will go to pieces so I'll just stop there and take John's questions do you do you understand yeah I will thank you well you can see that was like a little teaser for the whole book I think it was the whole book but there's a lot of my had five more years ah well you answered one of my questions which was about the United States I'm sure others will have further questions about that so I'm actually going to just ask one question excuse me and that's about global economics I know you're mainly talking about nations but I'm interested also because globalization is so important to our way of understanding these things now I want to ask about the effect of structural adjustment policies of privatization marketization especially in the developing world where I think many critics would say they could these policies could be viewed in effect as extractive that is that they're the conditions that have been imposed from time to time by the IMF and other international financial institutions can be viewed as undermining the vitality of political institutions in developing countries that are needed for growth particularly so how does your analysis Square with that criticism I think you're raising several interesting issues so let me first touch up on something that you know emphasis on the global economy suggests which is sort of partly missing from the book you know we talked about it but it doesn't sort of receive enough of the emphasis that the sort of emphasis that it deserves which is that you know at the end of the day you know our analysis is very much focused on nations and that's why you know we talked about nations but in an increasingly connected and globalized world and of course this was true even you know in the sixteenth century you know the external conditions matter a lot so we only touch on this in the book for example in the context colonialism how colonialism not only changed what went on in Europe but it changed what went on in the Americas in Southeast Asia and in Africa but I think that's an area which requires much more of a sort of systematic framework and part of that systematic framework would be you know how do you think about international organizations in that context how do you think about the IMF how do you think about the United States is impact in in other countries and so on so we don't we don't quite have that in the book but me that is it may I think I can still say a few things about structural adjustment and privatization so I think my view is a little different but it might arrive to the same sort of conclusions that actually on paper many of the ideas that were pushed by the IMF weren't or the World Bank or other international organizations you pick weren't actually misguided so sure if you look at any society where the government is a big part of the economy that creates both political and economic distortions first it creates economic distortions because governments are not good at running businesses and second it creates huge political distortions because patronage politics is much encouraged but you really also have to think of the context in which privatization is being done and in what way it's being done and take again some examples you know in Mexico for example you had the part of the privatization of Telmex you know how was it done well it was done through a very opaque auction which at the end allocated it at a very very lucrative in a very very low price well shares for loans sort of scheme to Carlos Slim and you know lo and behold on the basis of this he became the richest man in the world so that sort of privatization of course is very troublesome first it creates it allocates assets in a monopolistic way so monopoly is bad it allocates assets not to the people who have the best value for them but it created allocates them to the politically powerful and it allocates them in a way that makes future economic growth quite problematic think take another example Russia so in Russia again I think there is little doubt in economic theory and I think economic theory is very correct here that it was imperative to privatize assets ultimately but the question is how do you do that the way that this was done was a true insider privatization again through a loan for share scheme in the in a political context where political power was very much in the hands of a set of shady people and it created the oligarchs and it paved the way for the return of the KGB so I think the way that I would sort of say it is that when economic advice is being given either for you know without understanding the political economy or for other purposes than economic enrichment of the country then it risks creating much deeper political inefficiencies that you know overwhelm the economic gains that these might create so I think in many cases but not in all cases structural adjustment policies fall into that category but then there are many examples in which when structural adjustment has been able to be done in the right way it has created you know efficiencies you know Turkey for example where finally some sort of structural adjustment was actually implemented in 2001 2002 was very important it reduced the effect of the government in the economy it brought inflation down it brought much better control mechanism for government spending you know not all of them are still alive today but but it's sort of underpin relatively healthy growth in the Turkish economy for a period of eight seven eight years so so I think what we have to distinguish but again this is my view is that good economics doesn't always translate into the right policy advice unless you take the political context into account okay let's open it up we have about 45 minutes we need you to speak into a microphone is that right because we are this is going to be on MIT television world whatever it's now called okay okay should I slow locational it actually why did she get it yeah I think I think it's better because otherwise I won't see the person who's asking the question this way look hello okay hi um locational advantages the first I'd like to say thoroughly enjoyed the book and can't find the notions of exclusive inclusive and extractive institutions useful Azure istic but I'm a little worried that it's hard to unpackage them except expose and the I mean the robber baron casein is one example if you ask somebody I think there's the debates over this now what the role of that period was in the American economic history you know you might have some people depending primitive accumulation you could probably have similar arguments for the 90s but I want to push it a little harder around the problem of taxation taxation can clearly be extracted it can also be used for inclusive purposes you can have extractive taxation used for inclusive purposes and the example I'd like you to comment on it is the paradox of the European welfare state being financed by a regressive tax which one might think is extracting the backpacks and America not having this and using progressive taxation in a way that doesn't allow it to produce the beneficial redistribution that we want to see in the education system and so on so you're referring to the v80 right so I think you're making some excellent points which I don't disagree with I mean but I think it's you know guilty as charged I think some things are might be quite difficult on the spot to say you know exactly how they function but I think that's in the nature of the beast and it's an ancient ancient nature of the beast for the following reason you know let me give you an example to illustrate that which is you know you can define extractive institutions on just one dimension so you can say you know if you have slavery that's bad if you don't have slavery that's good but really slavery you know nobody is interested in slavery as an institution in itself they are interested in slavery as an instrument for other things so slavery is useful as a very encompassing social institution that enables a group of people to dominate society politically and economically and course labor at very low wages to work in a certain set of occupations and what happens you know it's very well illustrated in the u.s. south you suddenly come from the outside and you ban slavery but then other things pop up which play more or less the same role as slavery so if you just focused on slavery you would say oh well you know slavery itself is you know has disappeared but instead other institutions that are quite different you know some of them are in the female form of vagrancy laws some of them are you know southern paternalism which sort of makeup together a de-facto institution that works in the same way as slavery having said that I think there are some common elements that we can see even as we go along so we don't have to wait all night all that much expose so any set of institution I think that is based on coercion and I think that is you know fairly clear perhaps you know one can disagree about the specific cases but it's fairly clear it's based on coercion either in the labor market or in product markets is extractive it forces people to enter into economic interactions that they wouldn't have done had had they had the choice so so therefore you have to sort of make do I think given these situations but coming back to the second sort of issues that you have raised I think taxation is a the way that I like to say I like to think about this but but you're right this is not actually sort of explained in any detail in why nations fail you know you cannot separate taxation from what the tax revenues are being used for so let's look at for example two cases Zimbabwe and certain as a year under Mobutu and Sweden which one is more extractive I think everybody with any reason would agree argue that a year is much more extractive but say it has a government tax revenue of around 5% Sweden you know upwards of forty five percent but you know what's important is that government tax revenue together with a lot of other government rents in Zaire are being used to enrich Mobutu and click around him whereas in Sweden they are being used broadly for what we would view as part of building an inclusive society providing education and daycare and other social services to everybody regardless of their income providing unemployment and other sort of social insurance so that there aren't great inequalities in society now to what extent is that made possible by V ATI I'm not going to be able to say anything of you know very definite on that but of course there are limits so if you had the same sort of redistribute of state in in Sweden and it was also financed by a very very progressive taxes that would probably start running into the incentives of you know who you actually want to invest in in Sweden also so I think the way that I would like to think about it is that you want to think of taxation together with how those tax revenues are being spent so again in a bundle of institutions and that's why again it's hard to say whether you know a particular thing a tax rate of 50 percent or 30 30 percent is that extractive or inclusive I think you really need to look at the context you can just choose sure please seems that way that's the next one no I mean that again I think that's a tricky question what we do in the last chapter is talk about the quote unquote pessimistic Kazon that meaning what it shouldn't do or how it might have got it went wrong in some cases but we don't sort of come up with a roadmap for these are the things that you can do and there is a reason for that because I think that's a much much more complicated question so I think you know not to belittle kind of institutional analysis which you know is what I've spent most of my time over the last 15 years but I think understanding what's on the ground in terms of the incentives or the players political social and economic incentives you know I think it's a feasible thing and we sort of know what to do but there's another sort of level of analysis to say okay these are the this is the political equilibrium so to speak and on top of it you take an act or a set of actors that they have their own objective and how can they intervene well first of all you need to have some theory of what is the slack in the political system because there's no slack whatsoever if everything is fully determined in the political system on the ground then from the outside there's going to be very little you can do so you need to have a system of slack it or what's in the slack in the system and in what way you can sort of play with that slack and also there are some ethical issues so for instance imagine that you're in you know you're a you're an international organization and you say okay I want to just bring investment to a nation but if you bring that investment and that in turn enriches the elite and the elite becomes stronger is that a good thing or a bad thing or you bring some sort of political into intervention you know you say okay we're not going to work with the government we're going to work with opposition groups or with other NGOs and in return this leads to some clamp down by the government on these NGOs because they're working with you like you know the Egyptian government jailed people because they were being financed by the United States as civil civil rights civil society organizations after the Tahrir Square so you know so that that raises a lot of ethical issues that I think you also have to deal with and you also have to take into account the objectives of foreign actors you know we've talked a little bit about the objectives of the IMF which I think in general is you know neither wholly good nor wholly bad but you know the same is up true for you know Norwegian NGOs also you know they are they have their own objectives which you know often overlap with bringing better civil rights and human rights sometimes prosperity but but but sometimes don't so I think there's a whole set of issues so that requires more thought yes please sorry huh and then after that - yes thank you very much I was worried if people say keyboards on what's happening in the Middle East from a point of view of institutional analysis but in particular the countries that have much weaker constitutions than before like Ceylon for example people always talk about the media but maybe the Yemen and the developed members and by the way how did you come up with this wonderful factor I mean I think Middle East is very very interesting I mean I think Middle East is extremely interesting for several reasons I mean I think the first is you know at least you know I think it's a great example of a case that was at the heart of all this kind of cultural explanations which really you know over the last three years you know proved not to be what it seemed you know the cultural explanations emphasized you know the Middle East there is a sort of certain set of Middle Eastern culture which not only condemns them to poverty but also means that they don't want to govern themselves they can't govern themselves there is a specific form of respect for authority that you know makes democracy impossible in the Middle East that we've seen that's not true and we've seen that's not true through a sort of set of moves that really illustrate perfectly illustrate in some sense the tensions of an extractive Society and I think Egypt under Mubarak Tunisia under Ben Ali Syria under Assad Libya under Qaddafi I think those are all examples of very clear extractive institutions you know in Egypt you know political power was hugely monopolized in the hands of the NDP and army and a small group of businessmen they the economic rules of the game were rigged such that you know you know there were monopolies created for the politically connected there wasn't the sort of economic there was an educational investments that would create a level playing field and when you look at the I mean my reading of the evidence is that when you look at people's discontent with the regime it was very much related to that extractive institutions I think you know people were actually sort of quite sophisticated in their analysis they were really discontented with their economic lot but then they link that to the political system so when people rose up in Tahrir Square they didn't say we want bread or we want better wages but they said we want to change this political system because it's only through political change that things will get better so I think in those senses it's it fits very well I would also say that it sort of fits very well in terms of the difficulties that all of the Middle Eastern countries are experiencing right now most notably Egypt and Tunisia and we'll continue to to to experience that you know one of the things that I didn't talk about at all but it's really you know one of the topics that that that gets most attention in the book is the process of institutional persistence you know how is it that institutions today pave the way for the sort of changes that can be feasible tomorrow or how one group will be able to dominate or how moves towards more inclusive institutions will or will not be hijacked by other groups that want to mold institutions to their benefit and we've seen them you know very clearly in Latin America we've seen them in Europe you know in Europe for instance if you look at the French it's the revolution you know another clear example of a movement that was fueled against the regime that people viewed as absolute least extractive repressive you know it let it it took about 70 years for France to reach stable institutions that were even minimally politically inclusive after the French Revolution so there was a very long period of political instability the same thing in Latin America so so it would be naive to expect that Egypt or Tunisia let alone Syria or Libya are going or Yemen would about which I know even less so I'm not commenting about him and if you notice we'll be able to turn themselves into stable democracies politically inclusive institutions overnight so so in that sense I think and those sets of tensions are I think are exactly the ones that we have seen in other cases what are the set of tensions in Egypt for example well in Egypt you have two sets of tensions that are pulling in different direction one is that one part of the ruling coalition under Mubarak the military try to run the country under a different guise now Eric is gone but will still run the country and you know we don't know the end of that but you know it was partly successful largely unsuccessful and then there is a danger that another group of people now have taken control and will try to create a different set of extractive institutions now with themselves at the helm the Muslim Brotherhood so so I think those are the tensions which you see always in whenever you have any sort of movement radical or gradual towards change that you always have to watch out for the for a new set of extractive institutions either inform a different but in essence the same or even inform the same but dominated by another set of people coming to the place what they were what they were fighting against yes please sorry just on this admire you're working that's okay thank you what do you make a comment that relates obliquely to your issue about the internet and hope for that there are two institutions which are extracted for this clipping that have an enormous impact what is the media and what are the courts and the point is that I mean the power link it's clear really does control access to the meeting I mean New York Times the New York Post are not the opinion Center and we've made things on the Cambridge and Washington that's not where they where things are created and there's an enormous grip on those institutions and it's done deliberately the second is the courts with this and United we're really the courts and the unbalanced stacking of the judiciary both of the trends in the concentration of the media and the courts do not bode well for even an internet inspired Society I mean there's a soup group of economists call incoming economists and say well there's maybe a groundswell revolution people are getting it fed up the Occupy Wall Street will turn into a seven day affair I'm not soft enlisting and by the way finally you know this morning in the NPR broadcasted mission the turkey is a nation that has jailed more journalists right than any other countries evolving the subject emergency and of course the courts are erased at how to listen can we be about regaining should we say less attractive characteristics in this country that's a great question I think on the media what isn't to the extent that I know the data what isn't a typical is that there are rich individuals involved within media that's always been the case in the United States that's been often the case in the past but they haven't always been sort of allied with the regime's there's no need for presuming that every you know Ted Turner could be a Democrat and Murdoch could be a Republican and they could sort of go against each other and and then if you don't like either of them there are other options I think that's sort of not a bad characterization of how the media was for instance at the beginning of the twentieth century or at the end of the nineteenth century you know the Hearst Empire and other big families dominated a lot of it but you're right that at least to the best of my knowledge I don't know of anything that sort of approaches the Fox News so there's a study by two economists stefano delle Lavinia and Ethan Kaplan and what they did is they exploited the fact that the four 2000 election Fox News was was broadcast in some counties and not others because of the way that the broadband cable was spreading around the country at the time and in places where the fox news was broadcast relative to their benchmark in the previous presidential election Bush got like something like two percentage point more votes which is huge so so so clearly some media is having an oversized effect on voting it might have oversized effect on other aspects for exam the rise of the Tea Party or the transformation of the Tea Party into what it is today but I think at the end also a recent research by economist Matt Ken scow and Jesse Shapiro shows that over the last twenty years there has been no decline in the variety of channels through which people get their news in fact it may have actually increased so if you look at the data there isn't really a very large fraction of the people who just listen to Fox News and part of it is because of the internet and despite the sort of the concerns that we have about the internet about the echo chambers and everything people seem to be getting a variety of different mediums the accessing different a variety of different mediums to get there at least to get what they're calling news and and in this survey so I think I would say glass is half-full or half-empty you know I I think certainly many matters much more because technology now enables one successful operating system to access much more so that's why something like Fox News is very important on the other hand a variety of things like the internet also make it much easier for people to enter at the margin so if you look at the French Revolution or the English royal Glorious Revolution pamphlets were extremely important it was very difficult for pamphlets to spread but and they weren't they weren't the sort of the sanctioned mechanism the courts didn't support them but they the pamphleteers were extremely active in criticizing the government and making fun of the king you know doing things that were totally unacceptable by the standards of the time and that probably did play a role in sort of molding the same courts I think that's a general problem I think there is no reason to expect that courts are going to be total total unbiased arbiters or you know a bulwark in favor of inclusive institutions and and we've seen many cases in which courts of one form or another have you know pushed in different directions and I think that's the concern and that that was also implicit in what I said the war on terror I think the the courts are much less willing to err on the side of free speech and in the context of the war on terror but but again I think the fact that citizens united gets criticized so much and and I think citizens united is just really the top tip of the iceberg this is united wasn't their money would be still as much in politics as it was you know so I think I think that is the problem Turkey I think is a bigger problem because not only because so many journalists are jailed but I would say that the bigger problem in Turkey is that the journalists who are not jailed have totally self-centered themselves and I think that is the real problem and that's the sense in which I'm saying things like the internet really helped because self censoring is perhaps a little less yes please and to these as many conclusions of analysis are devolved from empirical practice but actually China and Singapore man adopted very different institutions from American culture but they have made notable achievements and somewhat remain the stable States political and economic work so literally that there may be some different institutions suitable for different countries and to you it's sustainable thank you very much for your question I think that's a very important question and it's it's one of the things that unfortunately you know we spend quite a bit of time in the book but unfortunately in a short talk it's one of the things that I often sort of don't get time to talk about but but it's good that it's sort of raised in in the questions so so let me sort of give a sort of an answer that sort of goes back a little bit and tries to clarify a few things in the process I think the first one is that you know I was sort of a couple of times emphasizing that inclusive institutions are important for sustained economic growth and in the process I also mentioned Barbados for example a clear extractive society based on slavery was one of the richest places in the world so how come extractive Barbados could become one of the richest places in the world well it can because I think extractive institutions aren't inconsistent with economic growth they are inconsistent with prosperity in the short run and in fact there's a very good very very natural reason for it imagine you're a dictator or you're a ruling junta that controls everything would you like your country to be poor or rich I think most dictators would say rich the problem with extractive institutions that they can't maintain that prosperity and they can't maintain that prosperity because they are generally not open to innovation they are afraid of creative destruction they're afraid of innovation new technologies just like the Francis the first and Nikolai the first that I explained the context of the 19th century austria-hungary and Russia and often they don't allocate resources and they don't allow individuals to enter into the occupations according to comparative advantage they want to limit the occupations to themselves or to their friends or to completely allocate them so I think in this light learn what we have to ask is what are the conditions under which you can have let's call it extractive growth meaning growth under extractive institutions and I think I'll give you two examples which I think are quite typical of extractive growth one is Barbados so it became rich on the basis of sugar a valuable new piece that could be exploited quite successfully by the planter elite sure they could have done it more efficiently having such high mortality wasn't good either for the slaves or for them but still their method was enough for them to become very very wealthy and for Barbados to become one of the richest places in the world the other one is Soviet Russia so it Russia today we think of it as an economic basket case but actually people in the 1930s 40s 50s 60s 70s even 80s were amazingly excited about China about Russia perhaps as much as some people are excited about China today because Russia was growing so much and so fast on the basis of a different economic system many economists including some of the leading ones were showing Russia or Soviet Union as an alternative system of course it was nothing of the sort and it didn't generate any proper innovation and it was very inefficient and it sort of crashed and burned but in the process it did generate very rapid economic growth why because it was a for a case of state mediated reallocation of resources from very inefficient users to somewhat less inefficient users from agriculture which was extremely inefficient in Russia and overpopulated into industry where there was very little industry in Russia and it was made feasible by imported technology so Russia except for a few places which were related the armament industry did not innovate it just used existing technologies so so I think in that light there is nothing you know exceptional bike in the case of a country that grows rapidly for even extended period of time under extractive institutions and in fact the way that I would interpret China's rapid economic growth is a combination of a fundamental reform away from very extractive economic institutions where in which price incentives played no role whatsoever under full collective ownership to a mixed system where prices started playing at the margin an allocated role increasing production hugely in the late 1970s and then much more in the 1980s then the price incentives I can see essentially became fully dominant in the agricultural sector then in the in the urban order or the industrial sector so par of the Chinese case is really this rapid growth because of changes in economic institutions and another aspect is a bit like Russia which is that it's happening under extractive political institutions but there was so much inefficiency big both because a lot of resources were trapped in agriculture very product unproductively a lot of them were trapped in the state-owned enterprises that were running inefficient and now they're being reallocated and that's generating a lot of growth but I think again if there are if the sort of the ideas that we have sort of developed in the in the book have some validity Russia sorry China is going to run into problems with the given system because the given system is a mixture of somewhat extractive somewhat inclusive economic institutions increasingly more inclusive but still highly extractive because of the dominant role of the party and the command economy in the in industry together with an extractive political system and this combination of extractive political system and somewhat inclusive economic system are not always coherent cohesive and as low hanging fruit of importing technology from abroad which you know China still has quite a bit of room to doing so doing so since it's still less than one-sixth of the income per capita of United States and about one-sixth of the income per capita Germany I think knows what at some point will start running out and at that point I think either there has to be a more fundamental political change the sort of thing that for example we witnessed in Taiwan or South Korea which also started economic growth under extractive political institutions under under sort of an economic opening and then finally when there was enough demand from bar from bottom up the the military junta's sort of gave in or there will be sort of a clamp down just like in the Soviet Union not being able to keep up with the next stage of economic development and the way that I would say answer finally the sort of the things that you've hinted that again this this is just my perspective and the perspective that James and I have developed in the book I would say that country's context is very important but not very important for what is the right economic policy you know I think economically there is nothing hugely different across countries in every country you have entrepreneurial skills entrepreneurial talent you have a distribution of skills you want people to be able to have the incentives and the security to make investments and you want some sort of system mostly based on markets because that's the only one that works to allocate people according to their comparative advantage according to their talent where countries are different is in terms of their history and their political constraints so it makes sense for different countries to follow different paths that's because of the political reality but I wouldn't say personally that we need a different economics for China and a different economics for Taiwan and a different one for Germany I think it's the same economics but the political realities lead to different modulations thank you yes please no political system is going to tell you that it will in any fabulous view okay you know like one for one they don't that say that you know they want to make a thing they want to have more regulation so they can just some support the lower 99% one and level even say that well you have to support small business right so all right for the other hand you each of the feeds of this first of different parties fighting to try and build up their own political basis and as unless we take globalization for increases equality or word it also creates much more distrust among different are so much water distrust we're going to the mud slide and you see from sociological basis for that in terms of partners studies which talk for as diverse increases you have much more dispersed much of our society and the u.s. see that in Western Europe where even socialist age now there's much more particular sensors on the right for much more exclusive parties or much more so how do you see see that evolving over time as you know because I'm only gonna come and tell you the trading strategies everybody talk about inclusion at their product so how you start here you come okay as globalization increases I think those are very good questions I don't have perfect answers to them but I mean you're absolutely right nobody sort of claims that they're setting up a system that's going to benefit themselves at the expense of the rest so even Francis the first or Nikolai the first or the Ottoman emperors or the Chinese emperors they said we want stability for wrong people which was a code word we don't stability for ourselves but I think you know you're touching upon one thing that perhaps is different today than in the 19th century at the end of the 19th century the Gilded Age they're what I was drawing some parallels perhaps you know how the United States today might be able to sort of overcome the sort of challenges so I think you know because the government played so much of a more limited role in the 19th century and you know it was so much easier to have a sort of a set of ideas that sort of organized people and that said look you know there are people who are getting a special deal because of their political power and the color economic power they have the senators in their pockets you know the Senate wasn't elected and in fact many of the Senators were on the payroll of the robber barons and the robber barons are getting these really hugely lucrative deals and and it was sort of a simple sort of set of ideas that people could identify with today you know we have a huge federal government that has its own agenda it has huge amount of inefficiencies so then you have these sort of more mixed sort of thing which says you know oh you know federal government is part of the problem no federal government is part of the solution and that's much more divisive because it's neither part of the solution well it's both part of the solution and part of the problem so that might be a much more sort of a subtle message and might make it much harder for people to sort of organize around the right sort of ideals I don't know it's just possibility yes please is politically unstable you have a father but I would like you to make me it was emphasized that actually there's a connection between the economic and the political aspect because if you have the Equality the new man what you mention the oligarchs didn't like new men will not be able to become innovators if they're babysitting just trying to survive and they won't have the education absolutely yes actually that's why I mean absolutely that's that's what I was hinting at but I wasn't explicit enough that's why I was mentioning the education system in this context and then the other problem is really to what extent does in a society manage economic inequality together with a level playing field and I think there isn't a economic law that says you cannot have a level playing field with economic inequality but there might be very severe political constraints so ominously and in line with what you're saying the United States has experienced according to the data that you know some number of researchers have put together a quite significant decline in social mobility at the same time as inequality increased so so that suggests that indeed as you are saying you know if we take social mobility is the sign that people who start with you know poor parents and modest backgrounds rise up to become the leading entrepreneurs that's actually going down and that that is sort of a concern yes please yes I think that's what organizers well thank you very much good very interesting thank you it would speak a little bit more about I was I was very much interested in then what makes the society or the leaders choose these inclusive institutions because there has to be some kind of a factor eggs as it were for certain kind of conditions that allow them to choose the inclusive institutions that does allowed or sustained on the same level you you mention some of the figures that we need to choosing it doesn't say the Russian and military leaders choice disparity and the Russian case for will you maybe rooty situation had changed Germany's sweet one wanting to know what what are the things that are changing and then also you mentioned that account of institutions where they're hearing that was valuable then is it the same kind of conditions that allowed for the non choosing it should it should explain that the rice and the whole the wine ages succeed once but then fail again so what is happening so many questions I think all of them very good ones but so let me let me answer a subset of them we're let me try to answer a subset of them so I think you're absolutely right there are many ways in which you know inclusive or extractive institutions emerge and I have just Illustrated with the historical example one specific way which is particularly simple because it's sort of largely imposed or tried to be imposed from above but in many cases of course you know the reason why you know England ended up with the Glorious Revolution and then democratization in the 19th century and Russia didn't that's not so much of an external one it's sort of internal dynamics so I think we have to understand all of them and and I think the way that we sort of the framework that we sort of try to trace out in the the book is that we sort of have two elements to it one is internal dynamics so the way that different conflicts and tensions within a country gets resolved is going to vary some of it is going to vary for random reasons some of it is going to vary for historical you know roots so it is going to vary because of different sort of leadership and I'll come back to the CEO leadership in a second and that sort of creates an institutional drift if you start with two similar nation that institutional drift will lead them in different directions but then even bigger changes come when this institutional break drift meets critical junctures meaning that now you shock the system with big things world war two or the black death which is a huge demographic shock or the rise of Atlantic trade and internal in overseas trade for Europe in the data at the end of the 15th century so those interact with these existing conditions on the ground and lead to even more of a divergence and we try to sort of go through some big events in history through that sort of prism and as this sort of discussion perhaps hints that this is not a fully deterministic thing so that's the sense in which yes institutions are a set and a system and they're different parts are reinforcing each other and that's the feedback that for example I was mentioning when that's also at the root of the persistence but they're not unchangeable they're not so much malleable from the outside that if I come from the outside and I want to change one piece I can do so but they are subject to sort of opposition and demand for change constantly as you know for instance in which which rises and which absent flows as we've done in the context of the Middle East and in those contexts some some random factors will play a role and leadership will play a role but I think you know what we emphasize in the book is that yes leadership is important but you can't explain things by just the intentions of the leaders nor can you trust the success of a nation on the leadership on the leadership leadership matters in a number of different ways so for instance take the civil rights movement that I mentioned well leadership really mattered there if you didn't have a leader as unifying as Martin Luther King and any movement like the n-double a-c-p that that created sort of a relatively broad coalition and made it easy for the federal government and the northern sort of living of the Democratic Party to fall in line the civil rights movement would not have been as successful or would not have been successful it when it was or we talked about for instance in the book about Botswana where you know leadership of a different sort where somebody would the authority to sort of lead to tribal institutions turned out to be very different you know very constrained in some sense but also very different in his interests than almost all over the other post dependence African leaders said it's a comma and that probably did play a role but but I think for our theory you know if you want to think of it we don't have a leadership Theory theory of leadership we don't have an explanation for why so that say comma didn't try to undermine everything and Mobutu or Mugabe did so so they're sort of the residual that sort of a clique is shocked I think one more question yes please yes I can see that you're not describing your aniline exactly also and if I really you know pig in terms of this coat you know what my marks men make history but not under conditions I don't know the example of their choosing I guess I compared to Baltimore your work is heavier on the men make history part of that sentence whereas Barrington morals would be on the other side I mean condition so that's why I was also be puzzled you know when you were referring to leadership as you know it's not because of leadership that you know institutions are not inclusive or I mean there must be some room for that I see more political will in your work because your analysis is based on institutions and they are men made after work no absolutely you're right in the sense that I think it really opens the way for that but we don't have a theory for it so in other words yes director Moore is a great inspiration to us especially for the previous book before this one and and and of course both Marx and Marxist historians and barrington more have touched upon some of these issues I think the way that we are different from both of them in some aspects is and I would mention two of them in particular I mean and also we certainly don't subscribe to any of the Marxist economics but but I think in this context of your question one is that I think both marks and Barrington mark to a lesser degree really emphasize the sort of the defining role of economics you know and in Marx you know you know the funeral relations give you this and steam mill gives you this and and and for us you know in some sense economics matters but it's really political institutions and the distribution of political power that shapes it and we have you know you know within the context within the constraints that you know our work imposes on us we have some theory of these institutions but as soon as you open the way for institutions political institutions and political power that also opens the way for other forms of agency or other forms of individual behavior but that's why that's the sense in which I answer the previous question about policy as well that really requires a much more in-depth analysis of what is what are the slacks in the system and what is it that leaders can do and what are that they cannot do so probably I don't know so that's a comma if it wasn't said it's a comma but it was Mugabe in Botswana that would have made a big difference but said it's a comma would not have been to able to make so much of a difference in organ Ghana let's say so so that those are the things that I think that need to be analyzed and I think the key is not economic conditions or you know what Marx would call economic substructure but really the distribution of political power what qualities have formed what the facto and de jure distributed political power and constraints there are and then but but this is what we have right now book is for sale out here I really urge you to get one for your Republican friends for everybody really it's a great book Thank You Darren you

Channel: MIT Center for International Studies

Views: 20,542

Rating: 4.891892 out of 5

Keywords: Daron Acemoglu, John Tirman, Power, Prosperity, Poverty, Nations, Why Nations Fail, International Development (Field Of Study), CIS, Center for International Studies, MIT, Starr Forum, Economist

Id: r9cQzQVt8u8

Length: 98min 30sec (5910 seconds)

Published: Wed Jun 12 2013

Reddit Comments

[u/LtCmdrData]

Acemoglu's work is really impressive. He is still young for Nobel price in Economics, but everybody expects him to get one at some point.