The Rise of Democracy: The History of the Rise and Fall of the United States from a Cultural Divide to an Economic High-Dimension

On January 6th, 2021, rioters stormed the United States Capitol building. It was felt by many of us that the peaceful transition of power to a leader elected by the people could be in jeopardy.

As inauguration day approached, Americans feared that more violence was possible. The national guard troops went to the capital to stay out of harms way. Our democratic institutions were more fragile than ever.

The rise of tide against liberal democracy is a reaction to political failure to deal with the economic problems in America. Our institutions have become less inclusive and economic growth now benefits a small number of people. Some of the best economic research in the last two decades confirms this. Wage growth for most has stagnated. Social mobility has gone downhill. Our labor market has been splitting into two, where the college educated thrive and those without a degree watch their opportunities shrivel, after automation and trade with China destroyed millions of jobs that once gave them good wages and dignity.

Yesterday, the Royal Swedish Academy of Sciences called them to say that they had recently been awarded some of the Nobel prizes. The research done by Acemoglu and Robinson for their research on how institutions are formed and affect prosperity was one of the reasons why they were awarded the prize.

It’d be one thing for Acemoglu, Robinson, and Johnson to simply argue that institutions are critical to determining how rich a nation becomes. But, being economists, they also did some incredible statistical work to try and prove it.

Acemoglu, Robinson, and Johnson argue that these institutional differences persisted over time, explaining why there was a reversal in fortune — that is, why North America became so much richer than South and Central America. The paper finds a similar story in other countries that Europeans colonized around the world.

In South and Central America, where there were the Incan and Aztec empires, there were too many indigenous people for Europeans to simply move in and govern themselves. Instead, European colonizers introduced or maintained already-existing “extractive” institutions that were geared more towards exploiting and oppressing the indigenous population. The institutions were not meant to protect individual freedom, invest in and educate the population, or encourage innovation. Instead, these nations got institutions that were not suited for them in a modern, innovative industrial economy.

The Planet Money Newsletter: A Nobel Prize for an Explanation of Why Nationations Fail (with an Emphasis on the Future of Artificial Intelligence)

When I got news of the award, I got to say, I was really excited, especially for Daron Acemoglu. I’ve been looking at his research for a long time. In fact, one of the joys of my job at Planet Money has been getting to speak with him on multiple occasions and being able to pick his brain.

The Planet Money Newsletter has had Acemoglu as a fixture. In fact, Acemoglu made an appearance in last week’s newsletter! Acemoglu’s work was also featured in a recent newsletter on why artificial intelligence may be overrated; another on why artificial intelligence isn’t wiping out jobs even in areas where it seems to be really good; and another explaining Acemoglu’s profound insights about automation.

Given the Nobel news, we figured it’d be worth revisiting this newsletter from January 2021, which explored their ideas about the power of institutions and how they thought those ideas related to the United States during a volatile period in our history. You can read it here as well.

“I don’t think January 6th was a singular day of failure,” says MIT economist Daron Acemoglu, who co-authored the book with University of Chicago economist James Robinson. It took untilJanuary 6th to surprise me.

Source: A Nobel prize for an explanation of why nations fail

Reclaiming the High Ground of Democracy: What South Korea has to offer in terms of democracy, public investments, public education, higher education, open markets, and patents

Nations like South Korea have what Acemoglu and Robinson call “inclusive institutions,” such as representative legislatures, good public schools, open markets and strong patent systems. Inclusive institutions educate their populations. They invest in infrastructure. They fight poverty and disease. They encourage creativity. They are far different from the “extractive institutions” found in countries like North Korea, Venezuela and Saudi Arabia, where small groups of elites use state power for their own ends and prosper through corruption, rent-seeking or brutally forcing people to work.

“U.S. institutions are really coming apart at the seams — and we have an amazingly difficult task of rebuilding them ahead of us,” Acemoglu says. “This is a perilous time.”

Asked how we can stop our slide into national dysfunction, Acemoglu argues that political leaders need to focus on those who’ve been left behind and give them a leg up and a stake in the system. He advocates for a “good jobs” agenda that envisions policy changes and public investments to create, naturally, good jobs and shared prosperity (read more here). Robinson, citing the work of Harvard University political scientist Robert Putnam, argues we should find ways to transcend our political and cultural differences and connect with fellow citizens beyond our political tribes.

“Trump understood these grievances in a way the traditional parties did not,” Robinson says. “But I don’t think he has a solution to any of them. The same things happened with the populist experience in Latin America, where there were no solutions needed for success. Did Hugo Chávez or Juan Perón have a solution to these problems? No, but they exploited the problems brilliantly for political ends.”

For Acemoglu and Robinson, more democracy is the answer to our political and economic problems. They found that countries that democratized saw a 20% increase in GDP per capita over the course of five decades.

“We are going through a rough patch in our country,” he said. “And it is in some sense quite crucial that they reclaim the high ground of better governance, cleaner governance, and delivering sort of the promise of democracy to a broad range of people.”

The Wealth of Nations: Why colonialism is good, why autocracy is bad, and why China has grown to become a world without democracy

Despite being autocratic, China has grown to become the second largest economy in the world and lifted hundreds of millions out of poverty.

“Replacing democracy is very difficult,” he said. “When you introduce elections, that sometimes creates conflict. In societies with high levels of distrust, elections can lead to short-lived outcomes that are not democratic in nature.

The prize-winning researchers found that colonies where a large portion of settlers survived tended to have democratic institutions and prospered. Those that were relatively few settlers were more autocratic and ended up being stuck.

By coincidence, the announcement came on a U.S. holiday that honors both European explorer Christopher Columbus and the indigenous people of the new world.

“We don’t ask whether colonialism is a good or a bad thing, instead we note that different colonial strategies have led to different institutional patterns that have persisted over time,” he said during the news conference.

Daron Acemoglu and Simon Johnson from MIT and James Robinson of the University of Chicago will share the prize — worth about $1.058 million — for helping to explain how the different institutions in those former colonies continue to shape economic fortunes today.

The wealth and poverty of nations has been a preoccupation of economists since Adam Smith founded the discipline 250 years ago, when he wrote a book titled, The Wealth of Nations.