Acemoglu and us

For the last two decades, Daron Acemoglu, together with his co-authors Johnson and Robinson (and their critics) have been a constant source of inspiration for all those economists (like me) interested in the role of institutions in the economy, and in the interaction between economics, politics and history. They have been a recurrent presence in my lectures, my research and my blogging (for example, here and here). Now that I am temporarily on leave from academia, I missed talking about these last winners of the Economics Nobel Prize with my students this week.

Acemoglu and his co-authors have improved the terms of trade-off between finding very precise answers to small problems and finding imprecise answers to big questions. This is important and difficult. The challenges of our time are big, and will not be satisfactorily addressed by adding precise answers to very small problems. However, the research techniques of social sciences are very well developed for the small, but not the big questions. Acemoglu and his co-authors have mobilized a great deal of the arsenal of modern social sciences (causal econometrics, modern theory, case studies) to address big issues such as the challenges of democracy, inequality or technological change and how they interact. Because this is inherently difficult, they have received serious methodological criticisms, to which in some cases they have respectfully responded (for example, to the issues raised by David Albouy on their work, cited in the academic essay that justifies the awarding of the Nobel Prize, about the impact of settler mortality in the colonies as an instrument for the quality of institutions and contemporary economic outcomes). Recent research has raised serious methodological issues not only about the work of Acemoglu et al. on the deep historical causes of prosperity, but also on work they inspired about historical persistence by tens of researchers.

Their theoretical work on the difficulties of commitment in politics was followed by impressive (but, as mentioned, open to criticism) empirical work on the determinants of institutional change and the impact of (inclusive or extractive) political and economic institutions on prosperity in academic articles and later in the best-selling book “Why Nations Fail” (written by Acemoglu and Robinson, two of the three laureates). They contributed to improving the reputation of the book format among economists, also with “The Narrow Corridor” and more recently with “Power and Progress” –this one, by Acemoglu and Johnson, the best of the books in my view but not mentioned in the academic essay that justified the Nobel Prize decision. All these books have long bibliographic essays at the end, which are an amazing tool for teaching and research. They have also contributed to improving the prestige of multidisciplinary work on economics, politics and history.

After reading their books, I also learned about the importance of reading good academic book reviews. Probably the best book review I have ever read is the one by W. Bentley MacLeod on Why Nations Fail. And another very good one is the review by Avinash Dixit of The Narrow Corridor (you can find them through Google Scholar). Bentley MacLeod suggests that organizational economics and social choice would be good complements of Why Nations Fail. He casts doubt on the implications of the correlation between prosperity and the protection of individual property rights. Perhaps for poor societies, it is not optimal or possible to strongly protect individual property rights (for example, because insurance markets are not well developed). If they don’t have good property rights institutions it is perhaps not because they are making a mistake, but because they are doing what is appropriate for their level of development. Political scientist Yuen Yuen Ang has raised similar doubts about the institutions that are necessary for prosperity, suggesting that corruption is perfectly compatible with the development of market economies (although not desirable). Avinash Dixit suggests that the split between government and civil society in “The Narrow Corridor” (where Acemoglu and Robinson argue that the key to posperity is a government checked by civil society) is too simplistic, and that it is the divisions in politics and society and their interaction that drive social change. Dixit says that “if rifts in society do not exist, they can be created or exaggerated… leaders cultivate hatred to mobilize their people into conflict” (mentioning Trump and Modi as examples, although there are many more).

The two books have in common that they try to fit a common model to a big diversity of case studies over time and space, which is risky.

More than their specific ideas, the value of Acemoglu and his co-authors is to have raised the status of multidisciplinary work on institutions and the notion that power and social conflict are as important today as they were in the times of Marx. The idea that inclusive political institutions correlate with inclusive economic institutions and good economic outcomes is today challenged by the unstopped growth of China. Also, today the most economically prosperous country in the world (the US) looks into the abyss of political democratic collapse. The review of Bentley MacLeod has a graph summarizing the different impact of historical shocks on different nations depending on whether their institutions were inclusive or extractive. According to this, the different impact of the contact with America for inclusive England and extractive Spain would result into more prosperity for the British today. For all their great institutions, although the Brits still have a higher income per capita than us, Spain is growing more, lots of Brits come to party or to retire to Spain, and we didn’t make the stupid mistake of leaving the EU.

The notion of a “treatment” can hardly be transplanted from the medical sciences to economics or politics. The inherent difficulty of engineering prosperity results from the fact that human society is a complex system that is constantly changing over time. Institutions, culture, geography and technology co-evolve.

The book reviewers also point out the need for more research on local and international politics, and they question the nation as the relevant unit of analysis: can we compare China, the US or India to the small nations of the Pacific?

Acemoglu (the most famous of the three laureates) today is not the same as he was 25 years ago. Today, he has stronger opinions in favor of redistribution and government intervention. I would argue that he has become more progressive over time. His last book is a call to guide technological change in an egalitarian way through public intervention.

Acemoglu, Johnson and Robinson surely deserve the Nobel Prize –but perhaps they should share it with their critics and their book reviewers.

The very productive short life of Frank Ramsey

Frank Ramsey was a Cambridge academic that lived for only 27 years and died in the early weeks of 1930. I just finished reading his biography, written by philosopher Cheryl Misak (Frank Ramsey. A Sheer Excess of Powers, Oxford University Press), and published in 2020. It is a very detailed and well written book, covering both his life and his work (including short invited contributions by specialized scholars, for example Robin Boadway and Partha Dasgupta in economics).

I was attracted to it because I’ve been teaching Ramsey pricing in Economics Masters’ courses for a long time, and using it in my research on regulation. Ramsey had an incredible short life, in the last years of which he made important contributions to philosophy, mathematics and economics. He also had time to get married, have a lover and lots of friends, two children, and friendly (and also critically) interact with some of the best minds of his time, including Ludwig Wittgenstein and Bertrand Russell.

He was a socialist (although not interested in the Marxist dogma) and also an atheist. His brother, to whom he was very close, became a progressive Archbishop of Canterbury in the Anglican Church. He was also an optimist and a pragmatist interested in how rigorous knowledge could help build a better world.

In economics, he closely interacted in Cambridge with Keynes, Sraffa and Pigou, the brightest minds on macroeconomics, Marxist economics and microeconomics then and probably of the whole XXth century.

The piece of Ramsey that I’ve been teaching over the years is Ramsey pricing, the translation to utilities’ regulation of Ramsey taxation. This is an application of the theory of the second best, which says that when there are constraints in the use of instruments (not all the tools that we would wish are available), the policies may be very different from the ones that we should implement when there are no such constraints. In the case of Ramsey pricing, if subsidies to cover for firms’ losses are not available through undistortive taxes, then prices above marginal cost are necessary, in a way that those services with lower demand elasticity should have higher prices, if the objective is to minimize inefficiency.

In Economics, Ramsey also contributed to the theory of saving in a dynamic setting and to the concept of probability (in dialogue with Keynes). His theory of saving was later expanded by David Cass (my teacher in Florence in the last years of his career) and Koopmans, in the Ramsey, Cass, Koopmans model.

Economics and mathematics were both important in the work of Ramsey. Maths were a crucial tool to understand economic and social issues and to improve human living conditions. He was a mathematics professor because he was advised to choose this subject given his incredible skills, but he was as interested in economics and philosophy.

Ramsey’s ideas about utilitarianism and rationality were broader than what his work suggests, according to the author of the biography. His models reach conclusions from assumptions addressing important real life issues, to which a large literature has later contributed taking Ramsey as a reference.

He was an interdisciplinary genius as his strong links with Keynes, Wittgenstein, Russell, Pigou and Sraffa suggest. Not only they were important to him, but he was important to them. He was able to have a strong friendship with some if not all of them and at the same time criticize them intellectually.

Interdisciplinarity was not an excuse for Ramsey to lower the intellectual and scientific standards. In fact, in the case of Ramsey, it was a strategy to set them very high.

I strongly recommend this biography

Politicians and academics

After 22 uninterrupted years of teaching and research activity (which started after 7 years between my doctoral and my postdoctoral period), I have accepted a job (Secretary of Economic Affairs and European Funds) in the Catalan government as a result of the election of my socialist colleague Salvador Illa as President.

Politics is not something new to me, as I have been involved in it in an uninterrupted way since I was 16 years old and I was a councillor in Barcelona, my city, a long time ago, between 1991 and 1995, before going to Florence to study my PhD in Economics.

I guess that I will keep learning and thinking about how to build bridges between politics and the academia. There is a lot of ignorance on either side about what the other is doing.

Many politicians tend to believe that academics are in their ivory tower, living a relaxed life surrounded by books and curious students. Politicians that have been academics know better: Andreas Papandreou, an academic economist and the historic leader of the Greek socialist party, who had a very stressful political life, said that there was nothing harder than studying and working in academic life (he had a PhD in Economics from Harvard University).

Many academics tend to believe that politicians are selfish ignorants that could not have a private sector job. In fact, most politicians are hard working people motivated by the common good, and most of them are substantial individuals who could be good in other jobs, and actually have been good at other jobs. And yes, there are corrupt politicians (and corrupt academics).

But it’s true that there are many differences, and it is not easy to transition from one sphere to the other. I’ll do my best (again), aware that both worlds give you the chance to keep learning about the world and about oneself.

The social implications of the absence of free will

Robert Sapolsky is a professor of biology and neurology at Stanford University. In his recent book “Determined” (2023, Vintage), he presents a fascintating essay about the science of life without free will and its social (and legal) implications

He starts his analysis by rescuing the crazy argument that our Planet is supported by a giant turtle. Asked what supports the first turtle, proponents of the theory answered that it’s “turtles all the way down.” This is nonsense, but the expression is used by Sapolsky to basically argue that human decisions are “biology all the way down.” There are chemical and biological forces, produced by a combination of genes and the environment, that explain human decisions and behavior. There are no autonomous forces (no soul, no conscience, no free will) that are separated from the atoms that put together our bodies, including our brains, that explain why we do the things we do. As I once heard in a TV documentary, we are not that different from anthills, we are just “put together in a way that makes us look smarter.” Similarly, I read in the book (p. 386): “There is nothing but an empty, indifferent universe in which, occasionally, atoms come together temporarily to form things we each call Me.”

Of course, I lack the expertise to scientifically evaluate the claims in the book, but after reading it I am more persuaded than I already was before (and I tend to sympathize with materialistic interpretations of reality) that there is not much that we really choose, although we are brought to believe that we do.

As a good scientist, the author challenges himself by questioning whether his theory survives after taking into consideration the contributions of three successful branches of scientific knowledge: Chaos theory, Complex systems, and Quantum indeterminacy. Chaos theory shows that small changes somewhere can have dramatic implications at some distant point in time or space. Complex systems show that difficult to predict properties emerge from the interaction of a big quantity of elements that move following simple rules at the individual level (like in flocks of migrating birds). Quantum indeterminacy shows that at a subatomic level, there is a lot of randomness going on. But none of this contradicts -if anything, it reinforces (by looking at experimental and other evidence)- that human behavior is explained by the biological forces that, influenced by the social and material environment, acted one second before, one minute before… and all the way down.

In the second half of the book, Sapolsky looks at the social (and legal) implications of the absence of free will. That these implications do not need to be pessimistic is concluded by analogy of how social thinking has evolved in our consideration of conditions such as Epilepsy, Schizophrenia, or Obesity. Back in time, those that suffered these conditions, or their relatives, were blamed in one way or another, until science clarified that there were biological (genes plus the environment) explanations for these conditions. As a result, although there is still much to improve, these persons are treated today with much more respect and compassion.

What about killers and horrible criminals? Should we treat them like we treat those that suffer from epilepsy? Basically yes, concludes the author (who also discusses the differences between atheists and believers, and the evolution of the death penalty in the US, his country). That does not imply that they should not be separated from society, in the same way that governments impose lockdowns or quarantines. The example is the prison system of Norway, probably the most advanced country in the world. In a wonderful page (379), Sapolsky combines a condemnation of white supremacism with praise for Scandinavian social democracy. The author of the massacre of the Utoya island, where dozens of young socialdemocrat activists were killed, is today learning political science in a three room living space, separated from society, where he has access to TV, computer, treadmill, kitchen and social and psychological support. Countries that are closer to the Norwegian system have better social and educational outcomes than countries that are closer to more punitive systems and that look more to the past than to the future.

The book concludes with a profoundly egalitarian message. There is little individual merit in those that “succeed.” Readers should not skip the footnotes (or the personal autobiographic references of the author). In page 391, a footnote reflects about the words of a successful Harvard student of humble origin that, in a graduation ceremony, paid tribute to his parents, who made great sacrifices so that he could study: “My talents are indistinguishable from their labors; they are one and the same”

Social democracy against the insurgent far right

France stopped the far right in the recent legislative elections. The only feasible government that can emerge from the resulting Parliament is a coalition of the united left and the centrists, and this coalition can only be built around the pro-European center-left. 

In the UK, the Labour Party led by Keir Starmer defeated the Conservative Party, after the party of Winston Churchill had become the party of Boris Johnson, coinciding with the madness of the Brexit referendum.

Starmer seeks to correct market failures and improve the welfare of workers. It also seems to have a meaningful interest in spreading power more evenly across the kingdom and in increasing again ties with Europe.

In Spain and Germany, there is a social democrat prime minister in a coalition government. Both Sanchez and Scholz are pillars of European integration and reliable partners of the European institutions. In the Scandinavian countries, social democrats remain strong, although they have been weakened and they also face threats from the far right. In Italy, the only alternative in the mid run to Meloni is the the center left of the Democratic Party.

In the European Union, a coalition form the center right to the greens, with the social democrats in the center, has left the far-right in any of its versions, out of the current majority. Therefore, a continuity of policies to fight climate change and to further integrate Europe must be expected. The strategy of those on the right (such as Manfred Weber) that wanted to move the balance to normalize part of the extremists, has failed.

Von der Leyen and Tusk are not social democrats. But they are very aware that the pro-European left, is a crucial part of the alliance that must keep Europe united in a world that faces enormous threats. Von der Leyen mentioned the federalist Manifesto of Ventotene, authored among others by the Italian Communist Altiero Spinelli, in her acceptance speech.

In the US, any alternative to Trumpism depends on the ability of the Democrats to build a strong coalition form the extreme left to the center-right, with credible leadership, in the name of democracy and reason.

Australia has a Labour Prime Minister. Chile, Brazil, and Colombia have leftist presidents with the support of the center-left, and all of them had to defeat dangerous far right populist politicians in their presidential elections.

It is true, the world has seen democracies captured by identitarian national populists like Modi, Orban, Erdogan or Netanyahu, but it has also seen how their opposition grows stronger and they can be defeated, as their peers have been defeated in Poland or in the UK.

The emerging social democratic leaders and parties are federalist, meaning a left where the organization of government (European integration, decentralization, administrative reform to make a better use of expert and dispersed knowledge), the organization of a multi-level democracy, is part of the egalitarian project, is a necessary condition of it.

It is not the same social democracy of the post second world war decades or of the 1980s in Spain. It is weaker but it is still central. It is impossible to defeat the insurgent far right without the modern social democratic parties. They have added to their doctrine the need for a green transition to fight climate change in a fair way. Our parties must be aware of their mistakes, but proud of their accomplishments, and work together to give hope to workers and middle classes.

The best of Europe is on the pitch

The best football (soccer) in the world is played in Europe, although there is a lot of good individual talent in other continents. But the best club and national teams are European and, to be more precise, Western European, as recently emphasized by Simon Kuper. Of the best eight teams in the Eurocup (those that played the quarter finals), only one was not from Western Europe (Turkey). The four semifinalists are Spain, England, The Netherlands and France. I know, the World Champion is Argentina, which is a European team of Argentinian expatriates with a coach that lives in Spain, that tend to play most of their friendly games in Europe.

The best individual players of these four teams are very different from many of the fans that cheer for them in the stands or in the streets of the cities where their teams play (sometimes with agressive nationalist chants or sexist slogans). Williams, Yamal, Gakpo, Bellingham, Saka, Mbappé, Kanté… are most of them descendants of immigrants that reached Europe sometimes in very difficult circumstances. Some of the best German players (Musiala, Rudiger, Gundogan), eliminated by Spain in the extra time of one of the quarter finals, are not precisely the model preferred by the far right party AfD. The contrast between the emerging stars of European football and some of the emerging (and also disturbing) stars of European politics could not be clearer, as highlighted by a recent article of Gideon Rachman in the Financial Times.

Some of these players have used their celebrity status to confront the far right (especially the French players), and the far right politicians have not resisted the temptation to criticise the players (especially when their teams lose).

In the last three decades, as the far right vote share has been increasing in France, the proportion of non-white players born in immigrant families in the national team has also been increasing. To be fair, most of the best French players have always had names that were not typically French (such as Platini, Fernández or Zidane), but now the pattern has consolidated: the team that defeated Portugal in the semi-final played with not a single player with a “French” name, with twelve players of originally African families playing during the game, and defeating the powerful Portugal. Thanks to the immigrants (and despite a mediocre typically French coach, Deschamps), France has become one of the best national football teams, when traditionally it was only in the middle class.

The success of European football is not only the success of descendants of African immigrants, but also the success of open borders and free movement in the European Union. The success of the English Premier League builds on the Bosman Ruling of the 1990s (this increased equality among national teams and decreased it among club teams, as brilliantly explained by Milanovic in an academic article), which banned foreign quotas. As a result, the English clubs had to open themselves and accept foreign talent. Today some of the best coaches and players in England are foreign. Unlike some suspected, this has not made the national team any worse, but in fact better, because now the best English players have to compete and cooperate with, and learn from, the best foreign experts.

Western European national teams are more diverse than Eastern European national teams. In one game with Serbia, I noticed that all the players had a name finishing with –ic. All the players of Georgia were bearded. A Turkish player had to be banned because he made a fascist salute. In these cases, probably the players are more similar to the fans in the stands. Deep historical and political currents explain this contrast.

Marine Le Pen, the French far right political leader, has dismissed the players’ appeals not to vote for her party claiming that they are billionaire elitists, in many cases playing abroad. They may be billionaire today and some of them may work abroad (which sometimes is a good thing that may do even Le Pen some good perhaps), but they know their origins very well, and the origins of their families. These superb players are the best of their countries, and the best of Europe, and not the political leaders that fear and criticise them.

The left, the right, capitalism and democracy

Democracy is a set of political institutions that combine elections, the rule of law and civic freedoms. Capitalism is a set of economic institutions that combine markets, private ownership and firms where the owners of capital hire workers. These definitions, like all definitions in social sciences, may be disputed. I use the ones in the CORE Project’s e-textbook, The Economy (now in its second edition).

Democracy and capitalism do not always go together. There are, and there have been, capitalist autocracies and capitalist democracies. The main contradiction between capitalism and democracy is that the economic power in capitalism is in the hands of a minority, and this economic power may translate into political power. In a democracy, by definition, the executive and legislative powers are, at least formally, in the hands of a majority (who must respect minorities and the rule of law).

As a result of these tensions, the left is uncomfortable with capitalism and tries to reform it or replace it. In some extreme forms, the left has made the mistake of associating capitalism with democracy, speaking of a “bourgeoise democracy”. And atrocities have been committed in the name of the left over history.

But in general, the left and the center-left today are the most reliable defenders of democracy. The left is not by definition necessarily uneasy with the market as a mechanism of resource allocation, or with the existence of large private sector firms. But it is uneasy with the unfettered power of capitalists.

There is a left wing tradition of defending free international trade as a pacifist cause, and there are connections between progressive thinking and neoclassical economics. Kenneth Arrow, probably the most interesting of neoclassical economists, wrote an article making a “cautious case for socialism.” In pages 857-858 of Bowles and Halliday’s textbook on Microeconomics, they show that frictionless perfect planning and perfect markets can actually be represented by the same model.

But efficiency and equity are only separable under very unrealistic conditions, and in many realistic ones markets can worsen discriminations or segregation. Under appropriate institutions, markets have lifted whole countries out of poverty (China, but not Russia), but have done little to stop inequality, in fact they have increased it. Only when non-market (state or civil society) strong institutions can pre-distribute or re-distribute resources, markets are compatible with both efficiency and equity. That’s a possibility that should always be explored: an economic system with regulated markets (at the realistic scale, which is more and more global), efficient firms and constrained private property (call it reformed capitalism or cautious socialism) should be the perfect complement of democracy.

Today, the biggest threat to democracy comes from the support of some capitalists for political leaders that threaten the rule of law and civic freedoms (and also elections when they don’t deliver the result that they expect). It is not a mistery why many among the very rich (and many “both siders”) endorse Donald Trump or Marine Le Pen more or less openly, as well as in the past they endorsed Hitler. They give support to these likely authocrats because they give priority to their short run economic interests (lower taxes, less regulation), they don’t really care about democracy for any ethical reasons, and they underestimate the economic and social risks that themselves also face.