19 SEPTEMBER 2011

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 massive

books: 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 running

long, but please don’t cut this part.”

Not a word.

Photographs by Peter Tenzer

JOB MARKETS

Region: You’ve done a great deal ofresearch 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 ofthe 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 thinkthat there are serious structural prob-lems with the U.S. labor market that willkeep the economy down more and moreover the next decade. They’re related tothe fact that our workforce, especiallythe male half, hasn’t really made anadjustment to the new technologies andtypes of skills that are required. Labor market imperfections play a

role in that, in the sense that I thinkmost people are not sufficientlyinformed about the sort of skills thatthey will require. They get theirunderstanding of the labor marketthrough word of mouth, from theirparents 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 informationabout job requirements and necessaryeducation?

Acemoglu: You can say that people aren’tfully informed. But there are probablyother things going on as well. Perhapsthe culture frowns on men doing certainof these jobs, be it in the health care sec-tor, retail or clerical jobs that are com-plementary to the new technologies.These are not the typical “male jobs,”and that might be part of it. But another important aspect is that

social insurance programs, while notvery generous, have really relaxed theireligibility requirements. A lot of people

who get discouraged because thesort of jobs they wereexpecting don’t exist,drop out of the labormarket. So, disabili-ty rolls, for exam-ple, have exploded,mostly with low-skilled males whoare frustrated becausethey’re not finding thesort of jobs they hopedfor. This is not to saythey are all faking dis-ability; I don’t think that’strue, but I think peoplehave adapted to thinking

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Bread-and-butter jobs of previousdecades have gone; now those tasksare being performed by robots andcomputers, and instead we have anexplosion of demand in the servicesector, in middle- and low-skillservices. … But for the most part,U.S. workers, especially U.S. males,haven’t really made the transition toperforming them. … Another impor-tant aspect is that social insuranceprograms, while not very generous,have really relaxed their eligibilityrequirements. … These factorshave raised the structural rate.But I don’t agree that what weare seeing right now in theU.S. labor market is juststructural unemployment.The sudden increase in andthe composition of jobless-ness points out that thisunemployment experienceis 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 Journalof 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 werejust 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 isjust structural unemployment. It seems quite clear that the sudden

increase 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 relativelylow unemployment, so most labor econ-omists in the United States didn’t reallyworry 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 theyhave been really that useful for thinkingabout why is it that we have these longperiods of unemployment? I think we probably need sort of a

paradigm 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 inequalitytrends. 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 byunderstanding 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 havemade 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 much

more 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 col-league David Autor has been veryimportant. His work with Frank Levyand Richard Murname has pushed theidea that a very important factor inthinking about this is to recognize that alot of recent technologies have substitut-ed for routine tasks that workers used toperform [“The Skill Content of RecentTechnological Change: An EmpiricalExploration,” Quarterly Journal ofEconomics 118, November 2003, pp.1279-1334].That really helped us think about the

microeconomics of technology withinfirms, how these new technologies areaffecting the way that firms are organ-ized and what types of jobs they offer. Ithas also been very useful for thinkingthrough the sorts of questions that westarted talking about at the beginning,which is about structural unemploy-ment, the demand for certain types ofworkers disappearing and so on. Now, Ithink, it is leading toward a better con-ceptual framework for the analysis oftrends in employment and inequality.

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Trade, offshoring and outsourcing …have become quite important, evenmore important, over the lastdecade. We also have made muchmore progress in understandinghow technology changes thedemand for labor and interactswith the organization of firms andof tasks. … Rather than thinkingof college graduates versusnon-college graduates, it’s muchbetter to think of a wider range ofskills, because these technologicalchanges have actually hurt themiddle of the income distribution,while at the same time helpingboth 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 ofchanges that have happened in offshoringand trade over the last 10 years could bevery consequential because they arereplacing precisely the products and func-tions that a very narrow group of workerswere performing in the U.S. economy. With this framework, it also starts

making more sense that rather thanthinking of college graduates versusnon-college graduates, which the earlyliterature did focus on (including myown 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 ifyou 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 expandingvery 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 ofworkers, high-skill versus low-skill,would mask this. Similarly, getting ourpicture 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 couple

of years, you’ve reached greater clarityover how financial crises should beaddressed and how they could be limit-ed in the future. What do you thinkabout the Dodd-Frank approach, theFinancial Stability Oversight Counciland 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 have

you 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 mind

that additional regulation of the financial

industry was necessary relative to wherewe were in 2008. It was not a tenableequilibrium for finance to remain asunregulated as it was in 2007-2008 whileinterconnections in the financial sector—especially those linking a few majorfinancial institutions to the rest of thefinancial sector—were so great, and thereis the implicit guarantee, not primarilyfrom deposit insurance, but from the factthat the policymakers around the worldknow that you can’t let such an intercon-nected system fail. So that’s number one. Unfortunately, I also hold an opinion

that runs a little counter to that, which isthat, number two, you have to tread verycarefully with regulation because you’redealing with very complex and veryprofitable institutions, and nobody hasgreat ability to see what the futurearrangements are going to be. Many ofthe regulations might create a lot of inef-ficiencies; especially bad would be thosewhere the financial sector is able to over-come the intent of the regulation by cre-ating an even more inefficient structure. The shadow banking system is an

example of that. Nobody understood thatthe few regulatory provisions that existed

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You have to tread very carefullywith regulation because … we don’tknow what the next shadow bankingwill be. A lot of regulations should bein the form of speed bumps, meaningthey shouldn’t eliminate financialinnovation, but they should slow itdown. They especially should makesure that the core of the financialsystem doesn’t become mired in newtypes of assets and new risks beforethey are properly understood. …I am not convinced that the Dodd-Frank Act is going to prevent thenext financial collapse if the financialsystem actually continues on itscurrent 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 theyshould slow it down. They especiallyshould 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 liabilityside, so if we reduce leverage, that’s goingto resolve things. Obviously, excessiveleverage is a very dangerousthing, but I think that byitself 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 somebodyelse. In such a situation, there might stillbe major cascades from the failure of afew financial institutions, but therewouldn’t be net leverage. Of course, thereare different ways of defining leveragethat would deal with gross versus net. But when there is this interconnected

structure (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 thoseassets is still uncertain and evolving.

Again, it’s all with hindsight, but theallocational costs of excluding mostmajor financial institutions (andit’s not clear how you would treatinvestment banks here), such asBank of America or Citibank,from holding CDOs [collateral-ized debt obligations] andCDO-squareds might be quitelimited, because these financialinstruments might still be avail-able and held by hedge funds, soit’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 sensitive to aslowdown or reversal in U.S. house pricesthan foreseen, that this will bring down alot of hedge funds, but it wouldn’t bringdown the core financial institutions. So those sorts of regulations, I

think, ought to be considered. But thedifficulty is that you don’t want tomake those regulations extremelydetailed. I think the problem with theDodd-Frank Act is that the amount ofgood it contains seems to be dwarfedby the amount of additional minutedetails it contains. That fails to achievethe intent of the regulation. It alsogives better regulation a bad name,because people who are opposed toregulation can easily point to the pageafter page after page of paperwork andprocedural things that Dodd-Frankwants you to do. And I am not convinced that the

Dodd-Frank Act is going to prevent thenext financial collapse if the financial sys-tem actually continues on its current tra-jectory. I don’t think anybody can claimthat they know what’s going to happen inthe next five years in the financial sector,but the financial sector has become moreconcentrated. It’s very profitable, it is stillinvesting in highly risky assets and, infact, it hasn’t really cleaned up its balancesheet to a great degree. The bonus culture,for example, was one of the elements thatcontributed to the crisis—not by anymeans the only one, or the most majorone, but it was certainly an important fac-tor. It has remained the same. And theDodd-Frank Act doesn’t really do any-thing to deal with that. I don’t think theVolcker rule does anything to deal withthat either. I think something that’s much more

effective—and again, I view it as a speed-bump-type of regulation—is to increasecapital requirements. This is what BaselIII [http://www.bis.org/publ/bcbs189.htm]is doing, and the Swiss banking regula-tions are doing it even beyond Basel III.If you increase capital requirements,you’re essentially putting in speedbumps because the rate at which a bank

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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, as

long as they’re not very detail-oriented, Ithink hold more promise. When theyare 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 itselfmight be due to “the peculiar politicalprocesses that have been under way inthe United States over the last 25 years.” Can you elaborate on what you

meant?

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 byRaghu Rajan at the University ofChicago. And Raghu is a leading finan-cial economist and has written manyinsightful 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 itis 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 comment

about top inequality and the crisisbeing due to the political process, itfollowed other remarks I made toexplain why, in my opinion, this thesisdoesn’t hold water.Why not? First, I think evidence

that 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 incomedistribution 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 evidence,qualitative or quantitative, that even ifpeople at the bottom did make suchdemands, the political system wouldrespond to it. Over time, the U.S. politi-cal system seems to have become muchless responsive to what’s being demand-ed by the bottom. And third, I didn’t see any evidence

that GSEs really played such an importantrole in this whole thing. They were rela-tively late arrivals into the subprimescene, which the private sector had foughtvery hard to carve out away from theGSEs and had successfully done so. Thenthe GSEs came in because they thoughtthis was a profitable opportunity.

Region: So the demand timing waswrong, the political response wasn’treally there and the institutional detailsweren’t quite right either.

Acemoglu: Yes, the details of the institu-tional process just don’t seem to workout. Now, for all of this, we don’t haveconclusive evidence, but existing evi-dence doesn’t seem to support the thesis.And at the end, I said that if there was

going to be any link between inequalityand the financial crisis, I would have putit another way, which is that the finan-cial crisis and the inequality of the top 1percent, which has a heavy overrepre-sentation from the financial sector, hasbeen an outcome of the politicalprocesses that have removed all of theregulations in finance, and so createdthe platform for 40 percent of U.S. cor-porate profits to be in the financial sec-tor—which is just an amazing number.That is where financial sector profitsstood at the time.

Region: Really, 40 percent? Wow.

Acemoglu: Exactly, wow. And that’s fora sector that doesn’t use much capital,so it went to a very few, 20,000 or sopeople, in a very unequal way—espe-cially in the form of year-end bonuses.They were amazingly overrepresented

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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 theway 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 political

process 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 responsiblefor 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 ofyour seminal contributions in econom-ics: directed technical change. In brief,the idea is that innovation is directed bytwo competing forces: the price effectthat encourages innovation towardscarce 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?

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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 thinkall 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 ofbroad technological change. And when wewant 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 in

the 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 ofthem always dominates, and so on. When we turn to the environment, I

think the bigger picture insights seem tobe more important. Market size andprice effects come out in the context ofthe 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 in

environmental economics has been

about how we have to tax economicactivity to slow it down so that we don’tdamage the environment. If you think ofa single-sector economy, with one sectorthat depends on coal, or on gas, that’s theonly thing you can do: slow down thatone sector. If you want to reduce carbonemissions, you just have to slow downthat sector. Now, you don’t directly slow itdown; you change its composition of fac-tors, perhaps, but you can’t let that sectortake off at a very rapid rate and still, at thesame time, limit carbon emissions. Our perspective was, well, the econo-

my has several technologies; some ofthem are cleaner than others. How shouldwe shift toward the cleaner ones? Whenyou look at the climate science, there’s alot of emphasis precisely on this and onquestions such as, When is it that nuclearpower will become economical? When

will geothermal or wind or solarsolve both their cost and theirdelivery problems?

Therefore, the per-spective shouldn’t be,How can we slowdown economic activ-ity? Instead, it shouldbe, How can we shiftthe composition of eco-nomic activity away fromdirty technologies to

cleaner technologies? Now, that’s a very directed-

technical-change-related ques-tion, but it already comeswith a very importantimplication: The focusshouldn’t be on slow-ing down eco-nomic activity,

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The bulk of the literature inenvironmental economics has beenabout how we have to tax economicactivity to slow it down so that wedon’t damage the environment. …The perspective shouldn’t be,How can we slow down economicactivity? Instead, it should be, Howcan we shift the composition of eco-nomic activity away from dirty tech-nologies to cleaner technologies? …We expect there to be a distinctivecumulative aspect to research.Different technologies often build onpast successes in the same line oftechnology. … So when technologicalchange shifts away from thedirty technologies that areso fossil-fuel-dependent tothe cleaner technologies,it will also make itpotentially cheaperto produce theseinnovations.

but on changing its composition andchanging the type of technologicalchanges that the market generates.Moreover, and importantly, we

expect 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 I

think 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, becauseNordhaus in other work has consideredricher models—but the seminal contri-bution that Nordhaus made in the early1990s, 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 directed

technical 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 ofthat 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 policy-makers and economists. Many econo-mists have tried to evaluate the effective-ness of different policies, such as R&Dfunding, to encourage innovation. But a key question in evaluating

these policies is whether or not knowl-edge spillovers are large. And they’veproven very difficult to measure. You’vedone important research in this arenawith Joshua Angrist and others. Canyou tell us briefly why these spilloversare difficult to measure and what strate-gies have proven most successful ingaining a sense of their magnitude?Also, what’s your sense as to how largethey are, and what factors might influ-ence their magnitude?

Acemoglu: Excellent question. [Pause.]Let me first say why I believe, at kind ofa broad level, why such spillovers mustexist. And I will cite two sorts of veryqualitative evidence. One is that whenyou think of an innovation such as theiPhone or iPad—just to pick someexamples that have been extremely pop-ular—they make a tremendous amountof money for Apple. But still they leave alot of surplus for consumers, because weare receiving a large amount of con-sumer surplus above and beyond whatwe pay for these technologies. And secondly, they also open the field

to competing products that are alsoprofitable. So, Android comes in largelyinspired by the innovations of Apple, butthe patent protection isn’t so strong.There are some patent infringementcases, including one in which Apple wonan initial ruling against Taiwan’s HTC, amajor producer of Android phones.But this is the exception. There is a

whole host of innovations building onthese successful products, and the deeperyou go in terms of fundamental research,the more true that is. Apple itself wasbuilding on a host of innovations thatactually took place in academic researchlabs. A lot of other companies are build-ing on such things. So, at some level, it’sclear that spillovers exist.

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A second piece of evidence comesfrom patent citations. Every patent citeshundreds of other patents. It’s not reallypro forma defensive citation. It’s not as ifI was sitting in my lab, and I came upwith 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 starting

from a knowledge base that these previ-ous patents developed, and in manycases, 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 that

these spillovers are positive, althoughone can write down models in whichyou 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 beenvery unsuccessful in coming up withcredible answers. Part of the reason isthat it’s a very hard question, and part ofit is that we haven’t tried hard enough.

Go online to minneapolisfed.org forAcemoglu’s discussion of difficulties inmeasuring spillovers, and why intellectualproperty rights should be stronger for firmswith the greatest competitive advantage.

TRANSITIONS IN POLITICALECONOMY

Region: There’s so much more to askabout, 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 politicaleconomy. 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 graduate

school, 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 technologicallyinnovative and some aren’t, and somecountries have high savings rates andsome don’t. They are really related to thefact that societies have chosen radicallydifferent 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 mywork—that you wouldn’t make enoughprogress on the problems of economicgrowth unless you started tackling theseinstitutional foundations of growth atthe same time. That got me onto a path of research

that has been trying to understand, the-oretically and empirically, how institu-

tions shape economic incentives andwhy institutions vary across nations.How they evolve over time. And politicsof institutions, meaning, not just eco-nomically which institutions are betterthan others, but why is it that certaindifferent types of institutions stick? What I mean by that is, it wouldn’t

make sense, in terms of economicgrowth, to have a set of institutions thatban private property or create privateproperty that is highly insecure, where Ican encroach on your rights. But politi-cally, it might make a lot of sense. If I have the political power, and I’m

afraid of you becoming rich and chal-lenging me politically, then it makes alot of sense for me to create a set of insti-tutions that don’t give you secure prop-erty rights. If I’m afraid of you startingnew businesses and attracting my work-ers away from me, it makes a lot of sensefor me to regulate you in such a way thatit totally kills your ability to grow orundertake innovations. So, if I am really afraid of losing polit-

ical power to you, that really brings meto the politics of institutions, where thelogic is not so much the economic con-sequences, but the political conse-quences. This means that, say, when con-sidering some reform, what most politi-cians and powerful elites in society real-ly care about is not whether this reformwill make the population at large betteroff, but whether it will make it easier orharder for them to cling to power. Those are the sort of issues that

become first-order if you want to under-stand how these things work. And thisarea is where the majority of my time wasdevoted over the last 10 years, though I’vebeen working on it for 16 years or more, alot of it with Jim Robinson. Jim and I haveco-authored a couple of papers on theeffect of institutions on economic growth.We’ve written a lot on political processesand transitions, dictatorship, democracyand a series of papers on issues of politicalpower and elites and so on. Some of thatunderpinned our book Economic Originsof Dictatorship and Democracy, which I’ll

28SEPTEMBER 2011

There’s little doubt in my mind thatthese spillovers are positive. … Thequestion is, What’s their magni-tude? And I think there we havebeen very unsuccessful in comingup with credible answers. Part ofthe reason is that it’s a very hardquestion, and part of it is that wehaven’t tried hard enough.

come back to in the context of your ques-tion about the Arab Spring. And some ofit led to this new book that we finished—in fact, it’s here [lifting a roughly boundmanuscript from beneath several paperson 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 arevery popular in the media and policycircles. 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 ofpolicy 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 ofemphasis 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 thinkabout the Arab Spring, I think a coupleof issues are central, and some of themare the focus of this book, and some ofthem are the focus of both the previousbook, Economic Origins of Dictatorshipand Democracy, and this new book. The first issue, which we focus on

much 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 bothpolitical power and economic resources. So if you look at all of these societies

from 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. In

Syria, it’s also sort of obvious now; thenewspapers have explained in greatdetail how the Alawite minority, forexample, 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 Mubarakor Ben Ali had around them. And inthose countries, the army and the securi-ty forces were effectively keeping anykind 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 their tal-ents; it doesn’t allow markets to func-tion; it doesn’t give incentives to the vastmajority of the population; moreover, itencourages the people who controlpolitical power to suppress many formsof innovation and economic changebecause they fear it will be a threat totheir stability. So the result was large fractions of the

population were excluded from politicalvoice, they were excluded from econom-ic power and they also saw their livingstandards not increase because therewasn’t strong enough economic growth. There are exceptions in the sense that

Tunisia and Egypt did have some eco-nomic growth. They did have improvededucation of the population over the last20 years. But by and large, the majorityof the society felt that they weren’t get-ting enough out of this deal, and theyalso had very little faith that politics asusual was going to serve their interests. So, what to do? Well, most of the

time, nothing, because such a system isstructured and survives preciselybecause it is successful in denying voiceand power to the majority. If the major-ity had real power all the time, such asystem wouldn’t survive—in the sameway that a plantation society wouldn’tbe able to survive if 90 percent of theslaves really had a political voice. But the 90 percent have vast numerical

advantage if they can get organized—forexample, as in Syria, where the Alawitesrule society but are a small minority. Soit’s very difficult to keep the majority atbay all the time. Especially when there issome instability and some spark, as theone that came from Tunisia created in therest of the Middle East, people are able toorganize, they are able to solve their col-lective action problem and make realdemands from those who hold power. And what are those demands going to

be? The people who went to TahrirSquare actually wanted deep, fundamen-tal change. They wanted deep, funda-mental change, partly for economic rea-sons. But also, I think, if you read the

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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 ofthe discussion, the debate over “reform orno 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 ofDictatorship and Democracy. This alsofeatures to some degree here [in WhyNations 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 yourincentives to actually carry out the eco-nomic reform or the political reform? And that’s exactly what the people in

Tahrir 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 ofpolitical 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 concessions, butthey weren’t successful and there weredemands for deep political reform. The big question is, Is this going to be

a political revolution in the same way asthe Glorious Revolution in England,which unleashed a fundamental processof transformation in the political systemwith associated economic changes?Ultimately, such political revolutions arefundamental to the growth of nations.That’s one of the arguments we make. Or is it going to be the sort of revolu-

tion like the Bolshevik Revolution or theindependence movements in much ofsub-Saharan Africa in the 1960s, wherethere was a change in political power,but it went from one group to another,which then re-created the same systemand started the same sort of exploitativeprocess as the previous one?

30SEPTEMBER 2011

Current Positions

Elizabeth and James Killian Professor of Economics, MassachusettsInstitute of Technology, since 2010; Charles P. Kindleberger Professor ofApplied 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, EuropeanEconomic 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, 2005

Sherwin 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 andtraining, 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 verydifferent from the Romanovs, but theycreated an even more exploitative sys-tem than the Czarist regime in Russia.Many of the independence leaders insub-Saharan Africa, from Nkrumah toMugabe to Kenyatta, were obviouslyvery 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 byhis 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 institutionalvariations that we see around us in lightof this.

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

Acemoglu: Oh, thank you.

—Douglas ClementJuly 27, 2011

31 SEPTEMBER 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 fundamentalprocess of transformation in the politicalsystem with associated economic changes?Ultimately, such political revolutions arefundamental to the growth of nations.