Darren Acemoglu Interview

8/4/2019 Darren Acemoglu Interview

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http://slidepdf.com/reader/full/darren-acemoglu-interview 2/1419 SEPTEMB

Daron Acemoglu

The scope, depth and sheer volume of Daron Acemoglu’s scholarship are nothing short

of breathtaking, verging on implausible. A co-author jokingly complained, “He can write

faster than I can digest his research.” Another economist suggests that his extraordinary

productivity can only be explained by existence of an identical twin.

Through omnivorous curiosity, apparently boundless energy and profound intellect,

Acemoglu has produced seminal work in diverse, yet interrelated areas such as skills

acquisition, technological change, trends in inequality, unemployment and directed job

search, climate change economics, network economics, intellectual property rights and

innovation. (Not to mention the occasional technical article: “Generalized Poincaré-Hopf

Theorem for Compact Nonsmooth Regions,” for example.) His key focus in recent years:institutions and economic growth, and the dynamics of political economy.

The MIT economist’s gifts were recognized early. “I can say with some degree of

certainty that [his] was the best thesis that I had ever examined,” remarked Christopher

Pissarides, the 2010 Nobel laureate, of Acemoglu’s 1992 doctoral dissertation. “Original,

full of important ideas and massive, without superfluous material.” Acemoglu received

the 2005 John Bates Clark Medal, given to that year’s most-promising economist under

40. He’s been honored with numerous other awards as well, including fellowships in the

American Academy of Arts and Sciences and the Econometric Society.

But Acemoglu is not one to rest on his laurels, if indeed, he rests at all. In the six years

since the Clark Medal, he has written—along with scores of journal articles—two massivebooks: an award-winning collaboration with political scientist James Robinson on

dictatorship and democracy, and a 1,000-page graduate text on economic growth. Next

year, he and Robinson will publish Why Nations Fail . Four more books are in preparation.

And he fits in dozens of speeches around the world: In the first half of 2011 alone, he

delivered five keynote lectures, including one in Istanbul, his birthplace.

Predictably, given his body of work, this Region interview went overtime. (Portions

are web-only.) Even Acemoglu’s energy seemed to flag. But when asked about the political

economy of the Arab Spring, his eyes widened and he was off on an eloquent oral essay.

As it happens, the preface of his newest book is titled: “Why Egyptians filled Tahrir Square

to bring down Mubarak.” He pointed to the voice recorder, and said, “I know we’re runninglong, but please don’t cut this part.”

Not a word.

Photographs by Peter Tenzer



JOB MARKETS

Region: You’ve done a great deal of research on labor market imperfections,

looking at search frictions and asym-metric information, as well as importantwork on directed job search, matchingefficiency and the impact of unemploy-ment insurance. What’s your sense of the impact those factors are having onthe current U.S. job market?

Acemoglu: I pondered exactly that ques-tion over the last few years. Who hasn’t,I suppose? [Laughs.] And I guess I havea two-layered answer. I tend to think that there are serious structural prob-lems with the U.S. labor market that will

keep the economy down more and moreover the next decade. They’re related tothe fact that our workforce, especially the male half, hasn’t really made anadjustment to the new technologies andtypes of skills that are required.

Labor market imperfections play arole in that, in the sense that I think most people are not sufficiently informed about the sort of skills thatthey will require. They get theirunderstanding of the labor marketthrough word of mouth, from their

parents and their neighborhoods, andthere isn’t quite enough of an under-standing that most U.S. workers whodon’t have college degrees are notgoing to be able to get good-payingmanufacturing jobs.

Those types of bread-and-butter jobs of previous decades have gone;now those tasks are being performedby robots and computers, and insteadwe have an explosion of demand in theservice sector, in middle- and low-skillservices, for example, in health care,clerical occupations or customer ser-

vice. These are jobs that workers withhigh school or two-year collegedegrees can perform. But for the mostpart, U.S. workers, especially U.S.males, haven’t really made the transi-tion to performing them.

Region: So it’s asymmetric informaabout job requirements and neceeducation?

Acemoglu: You can say that people afully informed. But there are probother things going on as well. Perthe culture frowns on men doing ceof these jobs, be it in the health caretor, retail or clerical jobs that are cplementary to the new technoloThese are not the typical “male jand that might be part of it.

But another important aspect issocial insurance programs, while

very generous, have really relaxed eligibility requirements. A lot of pe

who get discouraged because

sort of jobs they expecting don’t

drop out of the lmarket. So, disty rolls, for exple, have explomostly with skilled males

are frustrated becthey’re not findin

sort of jobs they hfor. This is not to

they are all faking

ability; I don’t think ttrue, but I think pe

have adapted to thin

20SEPTEMBER 2011

Bread-and-butter jobs of previous

decades have gone; now those tasks

are being performed by robots and

computers, and instead we have anexplosion of demand in the service

sector, in middle- and low-skill

services. … But for the most part,

U.S. workers, especially U.S. males,

haven’t really made the transition to

performing them. … Another impor-

tant aspect is that social insurance

programs, while not very generous,

have really relaxed their eligibility

requirements. … These factorshave raised the structural rate.

But I don’t agree that what we

are seeing right now in the

U.S. labor market is just

structural unemployment.

The sudden increase in and

the composition of jobless-

ness points out that this

unemployment experience

is really related to thedownturn.



that a much more minor disability is suf-ficient to get on disability rolls, and theadministration of these programs hasbecome much more accommodating.

This is documented, for example, by David Autor and Mark Duggan [“TheRise in Disability Rolls and the Declinein Unemployment,” Quarterly Journal of Economics 118, February 2003, pp.157-205]. Their work on this and relat-ed issues over the last decade shows notonly the remarkable increase, but howeconomically elastic this is. If it were

just pure disability, you wouldn’t expectit to take place more in places that aremore depressed, especially moredepressed for low-skill workers, andthat’s what’s going on.

Region: Some contend that labor marketfactors like these have raised the structur-al rate of unemployment.

Acemoglu: Right, yes. I was just getting tothat idea in fact. I would probably agreewith the statement that these factors haveraised the structural rate. But I don’tagree—and I think it’s hard to agree—with the statement that what we are see-ing right now in the U.S. labor market is

just structural unemployment.

It seems quite clear that the suddenincrease in and the composition of job-lessness points out that this unemploy-ment experience is really related to thedownturn in economic activity. I think italso highlights that at some level, despitedecades of very productive work, weeconomists haven’t really made as muchprogress in understanding cyclicalunemployment as we thought.

At some level, this wasn’t so much of an embarrassment for us because theUnited States previously had relatively low unemployment, so most labor econ-omists in the United States didn’t really worry about unemployment, and mostmacroeconomists worried much moreabout employment than unemploy-ment. Even when search models havebeen successful in thinking about some

conceptual issues, I don’t think they have been really that useful for thinkingabout why is it that we have these longperiods of unemployment?

I think we probably need sort of aparadigm shift there, to combine someof the elements of the search model,perhaps, with some other ingredients inorder to understand these things.

TRENDS IN INEQUALITY

Region: Let me ask a related questionabout wage distribution and inequality trends. In a 2002 article [“TechnicalChange, Inequality, and the LaborMarket,” Journal of Economic Literature40, March 2002, pp. 7-72], you summa-

rized much of the research in this area.To summarize it still further, if I may,you said that trends in inequality canbest be explained and forecasted by understanding interactions of five fac-tors, all of which are constantly evolvingin interaction with one another: tech-nology, labor market institutions andpolicies, how firms organize produc-tion, labor market search and matchingefficiencies, and international trade.

It’s a tall order, of course, but I won-der if you feel that economists have

made some progress over the last decadein understanding those interactions.

Acemoglu: Yes, actually, in my opinion,this is an area where there has beenquite a bit of progress in that I think wenow have a better theoretical and betterempirical understanding of issues suchas trade, offshoring and outsourcing.Originally, they were—probably cor-rectly—downplayed relative to otherfactors, such as technology and laborsupply. But I think they have becomequite important, even more important,over the last decade.

And I think we also have made muchmore progress in understanding howtechnology changes the demand forlabor and interacts with the organiza-tion of firms and of tasks. Here, for

example, the work again by my league David Autor has been important. His work with Frank and Richard Murname has pushedidea that a very important factothinking about this is to recognize tlot of recent technologies have subst

ed for routine tasks that workers usperform [“The Skill Content of ReTechnological Change: An EmpiExploration,” Quarterly JournaEconomics 118, November 2003,1279-1334].

That really helped us think aboumicroeconomics of technology wfirms, how these new technologieaffecting the way that firms are orized and what types of jobs they offhas also been very useful for thinthrough the sorts of questions thastarted talking about at the beginnwhich is about structural unempment, the demand for certain typeworkers disappearing and so on. Nothink, it is leading toward a better ceptual framework for the analystrends in employment and inequali

21 SEPTEMB

Trade, offshoring and outsourcin

have become quite important, ev

more important, over the last

decade. We also have made mucmore progress in understanding

how technology changes the

demand for labor and interacts

with the organization of firms an

of tasks. … Rather than thinking

of college graduates versus

non-college graduates, it’s much

better to think of a wider range

skills, because these technologic

changes have actually hurt themiddle of the income distributio

while at the same time helping

both the top and the bottom.



For instance, a paper that I have writtenwith David Autor was an attempt in thatdirection [“Skills, Tasks and Technologies:Implications for Employment andEarnings,” Handbook of Labor Economics,

Volume 4, Orley Ashenfelter and David E.Card (eds.), Amsterdam: Elsevier, forth-coming]. It tries to provide a task-basedframework for labor market analysis andfor interpreting changes in inequality andemployment patterns. Once you havesuch a task-based framework, one thingthat becomes quite clear is that the sorts of changes that have happened in offshoringand trade over the last 10 years could be

very consequential because they arereplacing precisely the products and func-tions that a very narrow group of workers

were performing in the U.S. economy.With this framework, it also startsmaking more sense that rather thanthinking of college graduates versusnon-college graduates, which the early literature did focus on (including my own paper in the JEL that you men-tioned), it’s much better to think of awider range of skills, because these tech-nological changes have actually hurt themiddle of the income distribution, whileat the same time helping both the topand the bottom.

That might seem like a strange state-

ment, because most people have a pic-ture that the bottom is actually nowdoing really badly. But that misconcep-tion comes from bunching together themiddle and the bottom. If you look atthe 1980s, the bottom of the income dis-tribution was indeed doing badly. But if you look at the 1990s and 2000s, whatyou see is that in terms of employmentgrowth, occupations that are lowest-paying are actually expanding very fast.

Region: Services, for example?

Acemoglu: Personal services, retail, low-skill health care—those are expanding

very rapidly—so workers at, say, the 20thpercentile or the 10th percentile areactually doing better than, say, the 50thpercentile over time. They’re subject to

more positive changes in their earningsthan are the middle percentiles. So look-ing at the world just through two types of workers, high-skill versus low-skill,would mask this. Similarly, getting our

picture of what’s going on from lookingonly at the 1980s would mask thisbecause trends then were very differentfrom the 1990s or the 2000s.

THE FINANCIAL CRISIS: LESSONSFOR REGULATION

Region: Let me jump ahead anotherdecade, to the financial crisis. In 2009,you gave a presentation at theInternational Monetary Fund/WorldBank in which you answered the ques-

tion, What should we do about thefinancial crisis? with a three-wordanswer: I don’t know. I thought that waswonderfully humble. You said, alsohelpfully, what not to do: Don’t sacrificelong-term growth. Don’t create expecta-tional traps.

But I wonder if, over the last coupleof years, you’ve reached greater clarity over how financial crises should beaddressed and how they could be limit-ed in the future. What do you think about the Dodd-Frank approach, theFinancial Stability Oversight Council

and other regulatory initiatives thathave been taken?

As an example, in an Economist forum a year ago about taxing bank risk,you said that, actually, considerationshould be given to regulating the assetside of banking, that creating some“speed bumps” in financial innovationmight be worthwhile if the social valueof those innovations isn’t so great.

So, more generally, what thoughts haveyou had about lessons for regulation?

Acemoglu: I’m not sure that I havereached as much clarity as I would haveliked. [Laughs.] I’m pretty sure I haven’t.Let me make a somewhat disjointed setof comments.

There is very little doubt in my mindthat additional regulation of the financial

industry was necessary relative to wwe were in 2008. It was not a tenequilibrium for finance to remaiunregulated as it was in 2007-2008 winterconnections in the financial sectespecially those linking a few mfinancial institutions to the rest ofinancial sector—were so great, and is the implicit guarantee, not prim

from deposit insurance, but from thethat the policymakers around the wknow that you can’t let such an internected system fail. So that’s number

Unfortunately, I also hold an opithat runs a little counter to that, whithat, number two, you have to treadcarefully with regulation because ydealing with very complex and profitable institutions, and nobodygreat ability to see what the fuarrangements are going to be. Manthe regulations might create a lot of

ficiencies; especially bad would be twhere the financial sector is able to ocome the intent of the regulation byating an even more inefficient struc

The shadow banking system iexample of that. Nobody understoodthe few regulatory provisions that ex

22SEPTEMBER 2011

You have to tread very carefully

with regulation because … we d

know what the next shadow ba

will be. A lot of regulations shou

in the form of speed bumps, meathey shouldn’t eliminate financia

innovation, but they should slow

down. They especially should ma

sure that the core of the financia

system doesn’t become mired in

types of assets and new risks be

they are properly understood. …

I am not convinced that the Dod

Frank Act is going to prevent the

next financial collapse if the finasystem actually continues on its

current trajectory.



in the 2000s would lead to a shadowbanking system that would be so big andso dangerous. And we don’t know whatthe next shadow banking will be.

That’s the origin of my thinking that a

lot of regulations should be in the formof speed bumps, meaning they shouldn’teliminate financial innovation, but they should slow it down. They especially should make sure that the core of thefinancial system doesn’t become miredin new types of assets and new risksbefore they are properly understood.

As for focusing on the asset side of banking, I think a lot of the emphasisamong economists on regulation hasbeen on the leverage side, on the liability side, so if we reduce leverage, that’s going

to resolve things. Obviously, excessiveleverage is a very dangerousthing, but I think that by itself is only half of theproblem in the sensethat even with lim-ited leverage, thereare going to bemajor intercon-nections in thesystem. In fact,you can have a lotof interconnec-tions with-

out having any net leverage; I can justborrow from you and lend to somebody else. In such a situation, there might stillbe major cascades from the failure of afew financial institutions, but there

wouldn’t be net leverage. Of course, thereare different ways of defining leveragethat would deal with gross versus net.

But when there is this interconnectedstructure (which I think was the reasonpeople were concerned, very rightly,about the collapse of the financial sys-tem), you may also want to make surethat these core institutions—those whosefailure would be very costly for the sys-tem—should be discouraged from hold-ing, or not even allowed to hold, certainassets, especially as the nature of those

assets is still uncertain and evolving.Again, it’s all with hindsight, but theallocational costs of excluding most

major financial institutions (andit’s not clear how you would treat

investment banks here), such asBank of America or Citibank,from holding CDOs [collateral-ized debt obligations] andCDO-squareds might be quite

limited, because these financialinstruments might still be avail-able and held by hedge funds, so

it’s not as if the necessary capital

would be totally cut off.But it would mean that if, in fact,

those instruments turn out to be

more risky and much more sensitiveslowdown or reversal in U.S. house pthan foreseen, that this will bring dolot of hedge funds, but it wouldn’t bdown the core financial institutions.

So those sorts of regulationthink, ought to be considered. Budifficulty is that you don’t wanmake those regulations extremdetailed. I think the problem withDodd-Frank Act is that the amoungood it contains seems to be dwaby the amount of additional midetails it contains. That fails to achthe intent of the regulation. It gives better regulation a bad nbecause people who are opposeregulation can easily point to the

after page after page of paperworkprocedural things that Dodd-Fwants you to do.

And I am not convinced thatDodd-Frank Act is going to prevennext financial collapse if the financiatem actually continues on its current

jectory. I don’t think anybody can cthat they know what’s going to happthe next five years in the financial sebut the financial sector has become mconcentrated. It’s very profitable, it iinvesting in highly risky assets andfact, it hasn’t really cleaned up its bal

sheet to a great degree. The bonus culfor example, was one of the elementscontributed to the crisis—not bymeans the only one, or the most mone, but it was certainly an importantor. It has remained the same. AndDodd-Frank Act doesn’t really do thing to deal with that. I don’t thinkVolcker rule does anything to deal that either.

I think something that’s much meffective—and again, I view it as a spbump-type of regulation—is to inc

capital requirements. This is what BIII [http://www.bis.org/publ/bcbs189.is doing, and the Swiss banking regtions are doing it even beyond BaseIf you increase capital requiremyou’re essentially putting in sbumps because the rate at which a b

23 SEPTEMB



can expand its balance sheet is going tobe limited by the capital it has to a muchgreater extent than currently required.

Those are the kinds of things that, aslong as they’re not very detail-oriented, I

think hold more promise. When they are detail-oriented, they are easier toovercome and thwart, and they are alsomuch more costly to the daily function-ing of banks.

“TOP INEQUALITY” &POLITICAL PROCESSES

Region: Earlier this year, at the AmericanEconomic Association meeting, yousaid that top inequality (the top 99thpercentile) and the financial crisis itself

might be due to “the peculiar politicalprocesses that have been under way inthe United States over the last 25 years.”

Can you elaborate on what youmeant?

Acemoglu: Yes, sure. I think it’s useful toput that into perspective, because thatwas commenting on a well-known the-sis, that’s become even better knownover the last year or so, proposed by Raghu Rajan at the University of Chicago. And Raghu is a leading finan-cial economist and has written many

insightful pieces, including a wonderfulbook called Fault Lines.

Region: Fault Lines, right. He gave us a pre- view in an October 2009 Region interview[online at www.minneapolisfed.org].

Acemoglu: I sympathize with 80 per-cent of the book greatly. But the 20percent that has perhaps received themost attention, including by Raghuhimself, I think, in his presentations,is about this new thesis—and I think it

is really new, and I applaud that a lot,because new ideas deserve specialrespect—that the root of the crisis wasa regulatory response to the risinginequality experienced in the UnitedStates. I think this 20 percent is lesscompelling.

And the story goes like this:Inequality has been rising in the UnitedStates, and I think by that he was refer-ring not to the top 1 percent inequality,but inequality between the bottom quar-

ter and top quarter, or middle and thetop quarter. It’s been rising for exoge-nous reasons, for reasons unrelated tofinance or to banking regulations and soon. This rise in inequality generateddemand for appeasing the bottom of thedistribution, and the political processresponded by giving them cake insteadof bread, so to speak—by giving themhousing. And it did so by encouragingthe GSEs [government-sponsoredenterprises such as Fannie Mae andFreddie Mac] to give lower-income peo-

ple unsustainably cheap credit or sub-prime lending and mortgages.

Region: Creating the “ownership society.”

Acemoglu: Exactly: the “ownership soci-ety.” And the house of cards that wascreated came tumbling down. Thatwould be my summary of the 20 percentof Raghu’s book that he emphasizes a lotand is the part that I disagree with.

So when I made that commentabout top inequality and the crisisbeing due to the political process, it

followed other remarks I made toexplain why, in my opinion, this thesisdoesn’t hold water.

Why not? First, I think evidencethat the demand for redistributionfrom the bottom was strongest in the2000s is nonexistent. If anything, it wasstronger in the 1980s, which was atime when the bottom of the incomedistribution was falling and, in fact,there was a stronger labor movementto demand such changes. If you look atthe 2000s, the bottom of the income

distribution is doing well, actually, forthe reasons that we just talked about.In fact, the middle is not doing all thatbadly either in the 2000s, relative towhat was going on before. So the 2000sseem to be a particularly peculiar timefor people to make those demands.

Second, I actually see no evidqualitative or quantitative, that evpeople at the bottom did make demands, the political system wrespond to it. Over time, the U.S. p

cal system seems to have become mless responsive to what’s being demed by the bottom.

And third, I didn’t see any evidthat GSEs really played such an imporole in this whole thing. They were tively late arrivals into the subpscene, which the private sector had fo

very hard to carve out away fromGSEs and had successfully done so. Tthe GSEs came in because they thothis was a profitable opportunity.

Region:So the demand timing wrong, the political response w

really there and the institutional deweren’t quite right either.

Acemoglu: Yes, the details of the instional process just don’t seem to wout. Now, for all of this, we don’t conclusive evidence, but existing dence doesn’t seem to support the th

And at the end, I said that if theregoing to be any link between inequand the financial crisis, I would havit another way, which is that the fi

cial crisis and the inequality of the tpercent, which has a heavy overresentation from the financial sectorbeen an outcome of the poliprocesses that have removed all oregulations in finance, and so crethe platform for 40 percent of U.S.porate profits to be in the financialtor—which is just an amazing numThat is where financial sector prstood at the time.

Region: Really, 40 percent? Wow.

Acemoglu: Exactly, wow. And that’a sector that doesn’t use much capso it went to a very few, 20,000 opeople, in a very unequal way—ecially in the form of year-end bonThey were amazingly overreprese

24SEPTEMBER 2011



in the top 0.1 percent of the incomedistribution. And the thing is that thiswas underpinned by a politicalprocess, in the sense that it was an out-come of this lack of regulation and the

way that we have allowed the laws tobe changed for things such as sub-prime, and the relationship betweeninvestment banking and regular bank-ing. And those things also played amajor role, obviously, in the run-up tothe financial crisis.

So it could well be that a politicalprocess that responded not to the bot-tom of the income distribution, but tothe lobbying, financial and expertisepower of the very top of the income dis-tribution might have been responsible

for these two processes.

DIRECTED TECHNICAL CHANGE& GLOBAL WARMING

Region: I definitely want to ask aboutyour related work with James Robinsonon economic and political transforma-tion, but first let me jump to another of your seminal contributions in econom-ics: directed technical change. In brief,the idea is that innovation is directed by two competing forces: the price effectthat encourages innovation toward

scarce factors and the market size effectthat does the opposite, directs it towardabundant factors.

You and your co-authors recently applied this idea to the environment—global warming, in particular—andconcluded that because of the externali-ties involved, sound policy should re-direct technical change toward cleantechnologies without delay, and alsothat optimal regulation with carbontaxes and research subsidies need notreduce long-term economic growth.

And you compare it to other eco-nomic analyses of climate change inter- vention, such as the Nicholas Sternreport and William Nordhaus’ work.But could you give a quick primer ondirected technical change and how youapply it to climate change?

25 SEPTEMB

It could well be that a political processthat responded not to the bottom of theincome distribution, but to the lobbying,financial and expertise power of the verytop of the income distribution might havebeen responsible for these two processes

[of “top inequality” and the financial crisis].



Acemoglu: Sure. It’s useful for me toexpress it the following way, I think. Thedirected technical change idea really hastwo layers to it.

The first layer is sort of obvious to

economists, but hadn’t really been devel-oped and stated. It’s that just as we think all other factors go toward more profitableareas, investment in new technology andinnovative activities also goes towardmore profitable areas. I think in a microsense, nobody would doubt this. We don’ttalk of “technological change” in theabstract. We talk of technological changein the pharmaceutical sector, for example.We talk of technological change goingafter heart disease. We don’t just talk of broad technological change. And when we

want to understand technological changefor heart disease, we ask, What’s the mar-ket for heart drugs, beta-blockers, ACEinhibitors, statins or whatever?

So, that’s the most important part.Directed technical change was pushingthis idea at the economywide level.Technology, either across sectors oracross different types of factors—factor-augmenting or factor-substituting tech-nologies—is also going to be deter-mined by their profit incentives.

I first tried to develop these ideas inthe context of inequality and skill-

biased technological change. There themarket size and the price effects, whichyou’ve mentioned, turn out to be quiteimportant. If you want to understandhow this works in a more detailed level,you need to understand how these mar-ket size and price effects work. They cre-ate countervailing forces, but one of them always dominates, and so on.

When we turn to the environment, Ithink the bigger picture insights seem tobe more important. Market size andprice effects come out in the context of

the environment, and they’re in ourpaper, of course. But for purposes of ourconversation here, I think I can do jus-tice to the main ideas without gettinginto those details.

Essentially, the bulk of the literature inenvironmental economics has been

about how we have to tax econactivity to slow it down so that we ddamage the environment. If you thina single-sector economy, with one sthat depends on coal, or on gas, that

only thing you can do: slow downone sector. If you want to reduce caemissions, you just have to slow dthat sector. Now, you don’t directly sldown; you change its composition otors, perhaps, but you can’t let that stake off at a very rapid rate and still, asame time, limit carbon emissions.

Our perspective was, well, the ecmy has several technologies; somthem are cleaner than others. How shwe shift toward the cleaner ones? Wyou look at the climate science, ther

lot of emphasis precisely on this anquestions such as, When is it that nupower will become economical? W

will geothermal or wind or solve both their cost and

delivery problems?Therefore, the

spective shouldn’How can we down economic aity? Instead, it sh

be, How can we the composition of nomic activity away

dirty technologies cleaner technologies?

Now, that’s a very directechnical-change-related q

tion, but it already cowith a very impo

implication: The fshouldn’t be on s

ing down nomic act

26SEPTEMBER 2011

The bulk of the literature in

environmental economics has been

about how we have to tax economic

activity to slow it down so that we

don’t damage the environment. …The perspective shouldn’t be,

How can we slow down economic

activity? Instead, it should be, How

can we shift the composition of eco-

nomic activity away from dirty tech-

nologies to cleaner technologies? …

We expect there to be a distinctive

cumulative aspect to research.

Different technologies often build on

past successes in the same line of technology. … So when technological

change shifts away from the

dirty technologies that are

so fossil-fuel-dependent to

the cleaner technologies,

it will also make it

potentially cheaper

to produce these

innovations.



but on changing its composition andchanging the type of technologicalchanges that the market generates.

Moreover, and importantly, weexpect there to be a distinctive cumula-

tive aspect to research. Different tech-nologies often build on past successesin the same line of technology. So whenyou’re building a new car, you build onthe past advances in car technology;you don’t as much build on advances insolar technology. In the same way aswhen you build new solar panels,you’re building on the previous solarpanels, not on the diesel engine. Whatthat means is that there’s going to bestrong self-reinforcement in changingthe direction of technological change.

So when technological change shiftsaway from the dirty technologies thatare so fossil-fuel-dependent to thecleaner technologies, it will also makeit potentially cheaper to produce theseinnovations, these cleaner technolo-gies, in the future.

That was the basic observation that Ithink was most important in theapproach. And that’s the source of themore optimistic conclusions. Let meexplain that in the following way. If youhave a Nordhaus-type model—and Idon’t want to caricaturize it, because

Nordhaus in other work has consideredricher models—but the seminal contri-bution that Nordhaus made in the early 1990s, for example, was sort of a neo-classical growth model used for theenvironment, and reducing carbons isreducing capital accumulation. In amodel like that, parameters are going todetermine how aggressive you shouldbe in reducing carbon, but when youreduce carbon, you’re reducing GDP,you’re reducing growth.

The more optimistic aspect of our

perspective came from the realizationthat if what you’re doing with environ-mental policy is “tax one sector, but sub-sidize another sector,” you might actual-ly achieve in the long run quite success-ful growth, because the other sector isgoing to pick up the slack. If we have

enough technological ingenuity—andthat is an if, which I think we tried tomake explicit in the paper—and cangenerate cleaner technologies that avoidthe negative environmental conse-

quences of coal and oil, then there is noreason for our economy not to grow at ahealthy rate in the long run. So that wasthe optimistic part.

So in that sense, factoring in directedtechnical change made this conclusionmuch more optimistic relative toNordhaus and, of course, more opti-mistic than Stern’s review, which wasmuch more effective, and I believerightly so, [in warning] of the potentialdangers from climate change.

But on the other hand, it also made

policy prescriptions much more proac-tive than Nordhaus and, in that sense, farmore similar to Stern. And the logic of that relates very tightly to the directedtechnical change aspect. In the Nordhausapproach, it’s like a ramp-up thing: Youdon’t want to do too much becausereducing emissions today is costly, whilethe future is discounted. If you can cutthings in the future, why do it today?Now you can also add, “We don’t knowwhere we’re going to go, so let’s go slow-ly,” a very gradualist approach.

But let’s think of the logic of directed

technical change with cumulativeresearch. The less we do on green tech-nology today, the less knowledge isaccumulated in the green sector, so thebigger is the gap between fossil-fuel-based technology and energy, and thecleaner energy, so the harder it will be inthe future to close that gap. With moreproactive, decisive action today, wealready start closing the gap, and we’remaking it easier to deal with the prob-lem in the future.

GROWTH, INNOVATION &SPILLOVERS

Region: That’s great—a very clear expla-nation. And it leads me to a questionabout technological innovation as anengine of growth. Supporting innovation

has been a central concern for pomakers and economists. Many ecmists have tried to evaluate the effecness of different policies, such as Rfunding, to encourage innovation.

But a key question in evaluathese policies is whether or not knedge spillovers are large. And thproven very difficult to measure. Yodone important research in this awith Joshua Angrist and others. you tell us briefly why these spilloare difficult to measure and what stgies have proven most successfugaining a sense of their magnitAlso, what’s your sense as to how they are, and what factors might inence their magnitude?

Acemoglu: Excellent question. [PaLet me first say why I believe, at kina broad level, why such spillovers mexist. And I will cite two sorts of qualitative evidence. One is that wyou think of an innovation such aiPhone or iPad—just to pick sexamples that have been extremely ular—they make a tremendous amof money for Apple. But still they lelot of surplus for consumers, becausare receiving a large amount of sumer surplus above and beyond w

we pay for these technologies.And secondly, they also open the

to competing products that are profitable. So, Android comes in lainspired by the innovations of Applethe patent protection isn’t so strThere are some patent infringemcases, including one in which Applean initial ruling against Taiwan’s HTmajor producer of Android phones

But this is the exception. Therewhole host of innovations buildinthese successful products, and the de

you go in terms of fundamental resethe more true that is. Apple itselfbuilding on a host of innovationsactually took place in academic reselabs. A lot of other companies are bing on such things. So, at some leveclear that spillovers exist.

27 SEPTEMB



A second piece of evidence comesfrom patent citations. Every patent citeshundreds of other patents. It’s not really pro forma defensive citation. It’s not as if I was sitting in my lab, and I came up

with an idea all by myself, and then afterI came up with it, I looked around to seewhich patents it might infringe, and so Icite them defensively.

No, really these people were startingfrom a knowledge base that these previ-ous patents developed, and in many cases, they were trying to improve onthem. That’s why they cited them. Again,that’s an example of knowledge spillover.

So there’s little doubt in my mind thatthese spillovers are positive, althoughone can write down models in which

you can have overinnovation, but Ithink there’s little doubt that thoseexternality spillovers are positive.

The question is, What’s their magni-tude? And I think there we have been

very unsuccessful in coming up withcredible answers. Part of the reason isthat it’s a very hard question, and part of it is that we haven’t tried hard enough.

Go online to minneapolisfed.org for

Acemoglu’s discussion of difficulties in

measuring spillovers, and why intellectual

property rights should be stronger for firms

with the greatest competitive advantage.

TRANSITIONS IN POLITICALECONOMY

Region: There’s so much more to ask about, and we haven’t even touched onyour massive body of research on insti-tutions and on transitions in politicaleconomy. Perhaps we could end withthat, with your work with JamesRobinson on transitions in political

economy. I wonder if you could shareany thoughts you’ve had about how thatresearch applies to the Arab Spring.

Acemoglu: Yes, for the last 15 years, mostof my research is exactly what you couldcall, broadly, political economy. Why

don’t I talk about that a bit, and then wecan kind of transition into transitions.

Region: Perfect.

Acemoglu: My professional research did-n’t start with political economy,although when I originally began tostudy economics in high school and col-lege, I was interested in what today youwould call political economy—the inter-action of politics and economics.

But later in college and graduateschool, I started working on issues relat-ed to human capital, economic growthand so on. But then after a while, I sortof realized, well, you know, the realproblems of economic growth aren’t justthat some countries are technologically

innovative and some aren’t, and somecountries have high savings rates andsome don’t. They are really related to thefact that societies have chosen radically different ways of organizing themselves.

So there is much meaningful hetero-geneity related to economic outcomes inthe political structures of societies. Andthese tend to have different institutionsregulating economic life and creatingdifferent incentives. And I startedbelieving—and that’s reflected in my work—that you wouldn’t make enough

progress on the problems of economicgrowth unless you started tackling theseinstitutional foundations of growth atthe same time.

That got me onto a path of researchthat has been trying to understand, the-oretically and empirically, how institu-

tions shape economic incentives why institutions vary across natHow they evolve over time. And poof institutions, meaning, not just nomically which institutions are b

than others, but why is it that cedifferent types of institutions stick?

What I mean by that is, it woumake sense, in terms of econogrowth, to have a set of institutionsban private property or create prproperty that is highly insecure, whcan encroach on your rights. But pcally, it might make a lot of sense.

If I have the political power, andafraid of you becoming rich and clenging me politically, then it maklot of sense for me to create a set of i

tutions that don’t give you secure perty rights. If I’m afraid of you stanew businesses and attracting my wers away from me, it makes a lot of sfor me to regulate you in such a wayit totally kills your ability to growundertake innovations.

So, if I am really afraid of losing pical power to you, that really bringto the politics of institutions, wherlogic is not so much the economic sequences, but the political coquences. This means that, say, whensidering some reform, what most p

cians and powerful elites in society ly care about is not whether this rewill make the population at large boff, but whether it will make it easiharder for them to cling to power.

Those are the sort of issues become first-order if you want to unstand how these things work. Andarea is where the majority of my timdevoted over the last 10 years, thoughbeen working on it for 16 years or molot of it with Jim Robinson. Jim and Ico-authored a couple of papers on

effect of institutions on economic groWe’ve written a lot on political procand transitions, dictatorship, demoand a series of papers on issues of polpower and elites and so on. Some ofunderpinned our book Economic Orof Dictatorship and Democracy, whic

28SEPTEMBER 2011

There’s little doubt in my mind that

these spillovers are positive. … The

question is, What’s their magni-

tude? And I think there we have

been very unsuccessful in comingup with credible answers. Part of

the reason is that it’s a very hard

question, and part of it is that we

haven’t tried hard enough.



come back to in the context of your ques-tion about the Arab Spring. And some of it led to this new book that we finished—in fact, it’s here [lifting a roughly boundmanuscript from beneath several papers

on his desk] which will come out nextyear, next calendar year.

Region: Why Nations Fail ?

Acemoglu: Yes, Why Nations Fail . It’ssort of a broader take on what are thedeep causes, according to us, of thisgreat variety of economic outcomes andeconomic organizations that youobserve around the world, and we try tosort of have a coherent theory of thisthat is very different from those that are

very popular in the media and policy circles. It is also, to some degree, evendifferent from the ones that economistsarticulate. We put much more emphasison the politics of it, rather than geogra-phy and culture, which is what a lot of policy and media people emphasize, orthings related to optimal policy and howwe can improve policy at the margin,and how we can design policies better,which is what economists put a lot of emphasis on.

Our take is that the political con-straints here are central. And develop-

ment is all about breaking those politi-cal constraints, rather than just thinkingwithin existing political constraints andlooking at the optimal tax design or theoptimal unemployment insurancedesign and so on, within those con-straints.

Obviously, the two are complementa-ry, but I think this perspective is quitedifferent from what’s out there. So that’sthe major thing that’s kept me busy overthe last few years.

In this very long, roundabout way, let

me come to the question that you asked,which was about the Arab Spring.

Region: Ah, yes. I see that your preface inWhy Nations Fail is just that: You write,“Why Egyptians filled Tahrir Square [tobring down Hosni Mubarak, and what it

means for our understanding of thecauses of prosperity and poverty].”

Acemoglu: Exactly. If you want to think about the Arab Spring, I think a couple

of issues are central, and some of themare the focus of this book, and some of them are the focus of both the previousbook, Economic Origins of Dictatorshipand Democracy, and this new book.

The first issue, which we focus onmuch more in this book, is that thesesocieties weren’t dictatorships only inthe sense that they banned elections.They were dictatorships of a very partic-ular kind, but a kind that has been quitecommon around the world, where a nar-row segment of the society controls both

political power and economic resources.So if you look at all of these societiesfrom Tunisia to Egypt to Syria toBahrain or to Libya, a narrow elite con-trolled political power, limited the abili-ty of almost anybody else in society tohave any political voice and used theirpolitical power to distribute economicresources of the nation to themselves atthe exclusion of anybody else.

In Libya, that’s sort of obvious. InSyria, it’s also sort of obvious now; thenewspapers have explained in greatdetail how the Alawite minority, for

example, commands not only all the eco-nomically lucrative positions, but also allthe top positions of the bureaucracy andthe army. In Bahrain, that’s quite clearwith the Sunni minority. In Tunisia andEgypt, it was a little in the softer form, inthat many business interests that werefavored had very strong representationwithin the group of cronies that Mubarak or Ben Ali had around them. And inthose countries, the army and the securi-ty forces were effectively keeping any kind of real democracy at bay.

The consequence, perhaps not sur-prisingly again, is that when you have asystem like this when a very narrowgroup controls political power for itseconomic ends, it also is quite disap-pointing for economic growth. It doesn’tencourage new technologies to come in;

it doesn’t allow people to use theirents; it doesn’t allow markets to ftion; it doesn’t give incentives to themajority of the population; moreovencourages the people who con

political power to suppress many foof innovation and economic chbecause they fear it will be a thretheir stability.

So the result was large fractions opopulation were excluded from pol

voice, they were excluded from econic power and they also saw their listandards not increase because twasn’t strong enough economic gro

There are exceptions in the senseTunisia and Egypt did have some nomic growth. They did have impr

education of the population over th20 years. But by and large, the majof the society felt that they weren’tting enough out of this deal, and also had very little faith that politiusual was going to serve their inter

So, what to do? Well, most oftime, nothing, because such a systestructured and survives precbecause it is successful in denying vand power to the majority. If the mity had real power all the time, susystem wouldn’t survive—in the sway that a plantation society wou

be able to survive if 90 percent oslaves really had a political voice.

But the 90 percent have vast numeadvantage if they can get organized—example, as in Syria, where the Alawrule society but are a small minoritit’s very difficult to keep the majoribay all the time. Especially when thesome instability and some spark, aone that came from Tunisia created irest of the Middle East, people are aborganize, they are able to solve theirlective action problem and make

demands from those who hold poweAnd what are those demands goinbe? The people who went to TaSquare actually wanted deep, fundamtal change. They wanted deep, fumental change, partly for economicsons. But also, I think, if you read

29 SEPTEMB



blogs and other things they write, it’s alsoclear that they thought fundamentalchange could only come from politicalchange. In fact, from the get-go, a lot of the discussion, the debate over “reform or

no reform” focused on political change.So, the first move of the Mubarak

regime was to say, “OK, fine, you wantreforms? We’ll give you reforms. Just gohome.” And the reaction of the people inTahrir Square was, “No, you’ve got to becrazy, because if we go home, you’ll justcontinue the same system as before.”

This is the driving framework, the key element of the framework that Jim and Ideveloped in Economic Origins of Dictatorship and Democracy. This alsofeatures to some degree here [in Why

Nations Fail ]. If you are able to solve thecollective action problem and make somedemands, then promises of change or

economic goodies or political reform inthe future are not good enough. Becauseif I go away and stop the collective actionthat is taking place in Tahrir Square orany other place, tomorrow what are your

incentives to actually carry out the eco-nomic reform or the political reform?

And that’s exactly what the people inTahrir Square said: “No, we don’t believeyou. The moment we go home, you’regoing to re-create the same system.” Theonly way of making those reforms cred-ible is to change the distribution of political power and make the reformsright away. That’s exactly what the peo-ple in Tahrir Square wanted.

So at some level, therefore, we under-stand through the lens of this frame-

work, I think, how the dynamics playedout, why the demands were made in theway they were made and why people in

power tried to make concessionsthey weren’t successful and there demands for deep political reform.

The big question is, Is this going a political revolution in the same w

the Glorious Revolution in Engwhich unleashed a fundamental proof transformation in the political sywith associated economic chanUltimately, such political revolutionfundamental to the growth of natThat’s one of the arguments we mak

Or is it going to be the sort of revtion like the Bolshevik Revolution oindependence movements in mucsub-Saharan Africa in the 1960s, wthere was a change in political pobut it went from one group to ano

which then re-created the same syand started the same sort of exploitprocess as the previous one?

30SEPTEMBER 2011

Current Positions

Elizabeth and James Killian Professor of Economics, MassachusettsInstitute of Technology, since 2010; Charles P. Kindleberger Professor of

Applied Economics, MIT, 2004–10; on MIT faculty since 1993

Previous Positions

Lecturer in Economics, London School of Economics, 1992–93

Affiliations

Research Associate: Canadian Institute of Advanced Research, Centre forEconomic Policy Research, National Bureau of Economic Research,Toulouse Information Technology Network

Fellow: American Academy of Arts and Sciences, Bureau of Research andEconomic Analysis in Development, Econometric Society, European

Economic Association, Society of Labor Economists

Honors and Awards

Honorary Doctorate, University of Utrecht , Netherlands, 2008

John von Neumann Award, Rajk College, Budapest, 2007

Distinguished Science Award, Turkish Sciences Association, 2006

John Bates Clark Medal, American Economic Association, 2005Sherwin Rosen Award, Society of Labor Economics, 2004

T. W. Shultz Prize, University of Chicago, 2004

Adam Smith Memorial Prize, University of York, 1989

Publications

Prolific author of research on political economy, institutional economics,development and growth, income and wage inequality, human capital antraining, technology and labor markets, and network economics. Award-winning author of Economic Origins of Dictatorship and Democracy (withJames Robinson).

Education

London School of Economics, Ph.D., 1992

London School of Economics, M.Sc., 1990

University of York, B.A., 1989

More About Daron Acemoglu



The Bolsheviks were obviously very different from the Romanovs, but they created an even more exploitative sys-tem than the Czarist regime in Russia.Many of the independence leaders in

sub-Saharan Africa, from Nkrumah toMugabe to Kenyatta, were obviously

very committed to throwing out thewhites. And they had very legitimatedemands, just like the Egyptians dotoday, but the system that they createdeither degenerated into something asbad or they personally created some-thing even worse, like Mugabe did whenhe destroyed Ian Smith’s terrible racistregime, and he created something evenas terrible.

Earlier, in the 1960s, Nkrumah came

to power in Ghana, and in Sierra Leone,Margai come to power. Margai re-creat-ed a very exploitative system. It was per-haps marginally better than the Britishsystem, but then Margai was replaced by his half-brother and then by SiakaStevens in 1967. Stevens made things somuch worse, but all of its roots were inwhat Margai had done, which was [hehad] just taken over the British systemand used it for his own political andeconomic purposes. Under Stevens, thewhole system sort of collapsed.

So, there is no guarantee that such

movements will translate into a broad-based political revolution, as opposed tosort of a palace coup where one grouptakes control for another. And again,part of Why Nations Fail is, we try tounderstand the conditions under whichone takes place and interpret the longswath of history and the institutional

variations that we see around us in lightof this.

Region: Thank you. I know we’ve justscratched the surface. This has been

wonderful.

Acemoglu: Oh, thank you.

—Douglas Clement July 27, 2011

The big question is, Is [the Arab Spring]going to be a political revolution in thesame way as the Glorious Revolution inEngland, which unleashed a fundamental process of transformation in the political system with associated economic changes?

Ultimately, such political revolutions arefundamental to the growth of nations.

Darren Acemoglu Interview

Documents

Transcript of Darren Acemoglu Interview