This week, Project Syndicate catches up with Daron Acemoglu, Professor of Economics at MIT.
Project Syndicate: You argue that the goal of creating good jobs “should guide policymakers’ approach to everything from technology, regulation, and taxes to education and social programs.” That’s easier said than done in the best of times, much less in an era marked by deep political polarization. What types of measures are policymakers likely to agree on, and which reforms are most urgent?
Daron Acemoglu: Most people are not motivated exclusively by income. They want meaningful and secure employment, which gives them the sense of being rewarded for their labor. This means that “good jobs” – which are reasonably secure and offer decent wages – are very important for a population’s welfare and for the healthy functioning of democratic institutions.
Policymakers have largely ignored the good-jobs imperative. But there is no guarantee that markets will naturally produce enough good jobs. Left to their own devices, employers might have incentives instead to create lower-wage jobs, to automate, or to squeeze their workers (in terms of wages or security), in order to increase their profits.
I see four broad areas where policy can contribute to the creation of good jobs. The first is minimum wages. If the problem is that employers are keeping wages too low – and creating the kinds of lower-productivity, lower-quality jobs that enable them to get away with it – then a wage floor would be effective.
The second area is corporate policy. Corporations have become obsessed with cost-cutting, even when it comes at the expense of their stakeholders, including their workers. This isn’t an easy problem to fix with regulation, but changing the overall business environment and giving a greater voice to workers (for example, by requiring that companies include worker representatives on their boards) would help.
Third, good jobs are less plentiful today partly because businesses have been substituting machines and algorithms for labor. Technology is wonderful, but there is such a thing as excessive automation. For example, companies might use machines, even in cases where hired workers would actually be more productive, because it reduces their tax burden. Such employers are unlikely to account for the social benefits of having plentiful good jobs. Given this, governments should implement policies – including tax reforms – to discourage excessive automation.
Finally, good jobs depend on technological progress that increases labor productivity and generates new tasks for workers. This type of “blue sky” innovation depends, in turn, on government support. Yet government funding of – and leadership on – research and development has declined in recent years. Reversing this trend should be another top priority.
PS: Back in 2012, you wrote that economic growth will ultimately stall in a state-capitalist system, because the innovation on which sustained growth depends “presupposes inclusive institutions.” But in today’s advanced economies, as you and others have noted, government-funded research and large-scale purchases of high-tech equipment contributed significantly to “four decades of strong, inclusive growth after World War II.” So, does China need systemic change to reach its goal of achieving high-income status, or only an adjustment in the balance between state and market?
DA: Rapid and constructively-directed technological progress depends on government funding and leadership. But this doesn’t mean that the government should decide which technologies and ideas to support, let alone tell companies what to do. Yet that is what happens in a state-capitalist system: businesses must operate according to the government’s objectives, and bureaucrats (in China’s case, Communist Party officials) decide which companies receive funding or preferential treatment, and which ideas are pursued.
Let me give a concrete example. A major success of Western innovation policy has been the development of low-carbon technologies, which would not have been possible without government funding for clean energy. But the government didn’t decide, say, whether businesses should invest in solar panels or wind turbines, nor did it support specific companies. Rather, it offered funding for innovation in a broad area.
An economy without any government support and leadership in innovation and one based on rigid state capitalism, as in China, are both highly imperfect. It isn’t clear which will run out of steam and when.
My view about China’s future growth potential hasn’t changed completely. But there is another factor to take into account. In the age of artificial intelligence, Chinese companies have one advantage relative to their European and American rivals: they have access to much more data, because of their closer links with governments and lack of privacy protections. I don’t think that this advantage can make up for the other inefficiencies of state-led development and innovation policy. But it is worth investigating further.
PS: How can countries with what you call extractive institutions build inclusive ones? Does a particular country’s experience offer a useful model?
DA: There is no single, typical way of building inclusive institutions out of extractive ones. Every country’s history is different and poses unique barriers to inclusive politics. But there are some shared priorities and guidelines, which James Robinson and I explore in some detail in our new book, The Narrow Corridor: States, Societies, and the Fate of Liberty.
We argue that inclusive institutions necessitate a balance between state and society. On one hand, there is the ability of state institutions to regulate economic, social, and political interactions; on the other, there is society’s ability to resist the state’s impositions and monitor public institutions and elites.
If you begin with excessively strong, despotic states and dominant elites, then you need to strengthen society. If you start with excessively weak, low-capacity states, strengthening state institutions should be the first priority. In many cases, it is vital to strengthen both states and societies, not least to foster trust in state institutions.
Broadly shared leadership is essential here. If just one narrow group or individual holds all the power, they are likely to leverage it for their own benefit, undermining institutions. Broad coalitions are one way to protect against such an outcome, while fostering trust in institutions.
There are many examples that illustrate these patterns. The fall of the apartheid regime in South Africa resulted from improvements in societal organization and mobilization (especially by the black majority, which was completely excluded from politics). The leaders of the African National Congress – Nelson Mandela’s party, which has won every election since apartheid – then formed a broad coalition, for example, by bringing English-speaking business interests on board. It helped that Mandela set such a powerful example of inclusivity, thereby fostering trust in the new constitution and political order.
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We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Acemoglu's picks:
by Richard Wrangham
This brilliant book sheds light on why humans are, on one hand, compassionate, cooperative, and egalitarian, and, on the other hand, violent, domineering, and murderous. It advances a thought-provoking “self-domestication” hypothesis, which claims that humans made themselves much more domesticated and cooperative than most other apes, such as chimpanzees, because they formed coalitions that killed and drove away excessively dominant individuals. This idea seems to have stronger theoretical (and evidential) foundations than most group-selection hypotheses, which claim that we became cooperative, fair, and moral in order to defend our group against external enemies.
by Tony Judt
This prescient and original book – which I am now reading for the second time – identifies the fault lines in the American and British economic and political systems, showing why powerful political backlashes were inevitable.
From the PS Archive
Acemoglu argued that universal basic income schemes are not just unrealistic and ineffective, but also suspect on democratic grounds. Read the commentary.
Acemoglu and Robinson identify the three structural factors that have been crucial to right-wing nationalists’ success. Read the commentary.
Around the web
In an EconTalk podcast, Acemoglu makes the case for policies that could lead to good jobs across skill levels. Listen to the discussion.
Acemoglu engages in a wide-ranging conversation with fellow economist Tyler Cowen, covering topics from the biggest challenges currently facing the Middle East to the economic causes and effects of democratization. Listen to the podcast.