Hello and welcome to a very special episode of the Odd Lots podcast, taped live in Chicago. I'm Tracy Alloway and I'm Joe Weisenthal. Joe, there's a lot to talk about when it comes to institutional failures now.
Yeah, absolutely true. You know, there's a lot of people, they talk about like geopolitics a lot, and of course there's multiple wars going on. But I also think that if you're in the markets these days and just think about the economy, you actually just have to talk about politics. You really do. And so I'm very happy to say that we have the perfect guest, someone who's actually never been on the show. But that's what I think a lot of listeners will have heard of him, because not only is he a Nobel Prize winner, he is also the author of the very famous book that you and I have probably read a couple times now called Why Nations Fail. So we're going to be speaking with James Robinson. He is, of course, a professor at the University of Chicago. Hope you enjoy the conversation.
Well, Professor Robinson, thank you so much for joining us. Really appreciate it.
Why do nations fail? No, no. Okay. Let me ask the other obvious question right now is just, I'm just going to get into it. Is the U.S. a failing nation?
I know. Okay, good. Not, not, not yet.
Yeah. Wait, I have one more. One more random question. Do you call yourself a Nobel Prize winner, or do you say I won, like, you're a Nobel Prize winner, right?
I think it's a real Nobel Prize.
Well, you know, there's some debate about that. You know, I know Alfred Nobel didn't actually specify a prize for economics, you know, and it came later on. Yeah. So, you know, it's a Nobel Prize. You're a Nobel Prize winner. I think you should just go for it.
Yeah, I've got, I've got the badge.
Oh, there you go. All right. The U.S. is not a failed state, is it? Or failed nation. Is it failing?
No. I mean, you know, by failure, you know, we're really talking about economic failure, economic success. Failure is a big word that covers lots of things. So, you know, my work is really about economics and about how societies who succeed economically do so because they create institutions, sets of institutions, kind of rules that channel people's energy, you know, in directions which are socially beneficial: innovation, entrepreneurship, creativity, you know, but those energies can be channeled in many different ways. And I think what you see in the United States historically is you've had very what we call inclusive institutions, you know, institutions, rules that are created very broad-based patterns of incentives and opportunities, economic success. You know, and poor countries like Venezuela, say, went into decline because they created the opposite, which we call extractive institutions. So institutions that don't create broad-based opportunities or incentives, they create incentives for very narrow cliques, the elites, you know, and most people are just excluded from opportunities. So, so I think the history of the U.S., you know, has been a remarkable success story. But I think, you know, as we point out in our work, in any society, there's always challenges to inclusive institutions. You know, some people were doing very well in Venezuela right out of that system. So, so I think, you know, there's always challenges and there's been a history of challenges in the United States, by the way. You know, it's not, it's not a simple, you know, good guy, bad guy story.
But the thrust of your work, if I understand it, is that typically in economics, and we talk about what's good economic policy, it's like, well, maybe we should have an independent central bank, maybe we should have a tax system that doesn't penalize productivity, etc. And all of that may be true, but all of this is downstream, essentially, from politics, right? Is this the idea that, like, there is no way to just like set up or write down a list of good economic policies if the institutions and politics aren't there in the first place to be conducive to it?
Yes. Absolutely. Yes. Correct. That's right. I mean, I think that, you know, that stuff about economic policy and economic institutions are all important. But the politics has to support that.
Absolutely. Yeah. How did you actually develop that approach? Because when we think about economics, I mean, we often think of traditional economics as a model that says if X happens, then Y is the result. It's all very formulaic versus your approach that really emphasizes, I guess, the politics, the institutional strength. And you also emphasize, I guess, critical junctures in history where things could have gone either way.
I think, you know, it's really, I was trained as an economic theorist, you know, and when I finished my PhD in 1992, I just, I had this kind of epiphany. And, and I realized I just, I was very interested in these problems, particularly of developing countries. And I realized I just didn't understand anything. And the first place I sort of... So I just needed to start immersing myself in some sense. And the first place I did that actually was in Colombia, interestingly enough. And when I got to Colombia, I realized I have no way of understanding what's going on here, and I just had to kind of back up and start asking myself why the things happened the way they do. And then, then the politics just looms incredibly large. Like, think about Venezuela. How can you understand the economic trajectory of Venezuela, all those mistakes, without understanding the politics of Chavez and Chavezismo, or even before that, you know. So, yes.
So all of this makes a lot of sense, and I find it very intuitive. But I also have an issue with, I guess I would say there's maybe a certain non-disprovability issue that, that I think about, which is that you say, okay, here's a rich country like Britain or the US, say they must have good institutions. And then here are some countries that are poor, Venezuela instead of Argentina, and you say, oh, they're bad institutions. But if we're only looking at the outcome, how do you actually establish sort of, I guess, a priori that that is the actual thing? Let's say you didn't, let's say you didn't know anything about the economy. You were the, you were looking at something about a country, but you were not given privy to GDP growth, anything like that. Are there other ways to know whether that country has good or bad institutions?
I mean, you know what? We got the Nobel Prize, me and my collaborators, for sort of trying, sort of establishing empirically this connection between institutions and economic development. But, you know, that's a hard question to ask. You know, you could look at life expectancy, you can look at infant mortality, you know, I think when you look at most failing countries, failing economically, yeah, they do badly in terms of income per capita, but they do badly in terms of most socioeconomic outcomes. Also, you can even look at night, you know, the most famous photograph we have in our book is the Korean Peninsula. At night it's getting brighter. The North Korean peninsula.
Maybe the presidential palace. And Pyongyang, you know, there's a wave pool, you know.
You know, you've mentioned Venezuela a couple times. Can you just apply your framework for us to Venezuela under, I guess, Chavez and Maduro and then Rodriguez now?
Well, I think, you know, that comes into path dependence, as you mentioned. Like, I think, you know, if you look at the history of the Americas, if you look at this economic divergence between North America, Latin America, you know, that's, that's very deeply rooted in history. It's rooted in the way very different types of societies got created in the colonial period. You know, in Latin America, you see societies based on coercion of indigenous people, on slavery, you know, and that created hierarchy, you know, created very extractive institutions. And that led to poverty. And, you know, I think, you know, if you look at the United States, of course, that's a complicated picture. The US South had what we would call extractive institutions. But for us, you know, and of course, the South until very recently was poorer than the rest of the country, was less urbanized, there was less industry. But, you know, the key thing is that when the US institutional framework got kind of definitively settled in, you know, with the Constitution, it's really the, you know, it's the North that somehow really created that, you know, so, so there were compromises.
And actually, can you explain, this is a little bit of history, because when they landed in the US, they were hoping to replicate the extraction of South America. It didn't work the same way. Why?
Yeah. I mean, that's a fascinating story that with the Jamestown colony, the origins of the Jamestown colony, you know, the colonists came with a model of how you colonize the New World, which is actually completely based on the Spanish conquest of Latin America. It's just that you couldn't, there were no indigenous people to exploit in Virginia. And, you know, there's a whole sort of farcical early history where the English settlers tried to, you know, try to set up a model exploiting indigenous people. In the, you know, in the meantime, they didn't bother planting any crops, and two-thirds of them starved to death because their model was, we don't work, you know, we exploit the indigenous people. And when that model crashed and burned, then they had to kind of experiment with other types of models, including let's get, we need to get British people to come here.
So how did you get them to come then?
They created a much more inclusive set of political and economic institutions because they realized, you know, of course, this was before the slave economy takes off. They realized that, you know, they have a viable economy here. We need to get people to come. And so then there's this institutional transition, you know, and Virginia creates this legislative assembly with universal male suffrage, which is a sort of unprecedented innovation.
Just going back to Venezuela. So with Rodriguez now, like, how did, like, how would you, is that system still an extractive system?
And we're not doing anything about it. And we should be, you know.
Well, this relationship that now us and Venezuela have, or Marco Rubio and Rodriguez have, what is a, is there an interesting parallel in history? Is this an unusual relationship, like, I...
Yeah, I think it's not so unusual. You know, I mean, I think if you look at the history of US relations with Latin America, you see similar things, you know, you know, the U.S. in the past occupied Haiti and, you know, Hispaniola, and, you know, so, so does the United Fruit Company.
It's not ridiculously anomalous. No. This is going to be a devil's advocate question. I just want to make that very clear before I say it. But is there a path where accountability to the U.S. for Venezuela could lead to more domestic democratic accountability in, in, in Venezuela?
Yeah, I, you know, I, I think it's very difficult for, for any outside power to sort out these problems. You know, in some sense, like what my research shows is that, you know, countries that make a transition from more extractive to more inclusive institutions, they do it because they find a way themselves or they sort it out themselves, you know, like Chile, for example. So, you know, Chile is by far the most successful economy in Latin America. It has the best functioning institutions. That was the Chileans that did that, you know. So I don't think the US can really solve that problem in Venezuela. You know, I think they could probably not exacerbate this, but, but, but I don't, I'm not sure that they're able to solve that, that problem. And I think it's an interesting question. You know, so I wouldn't say, you know, I wouldn't say Latin America is the way it is because of the way the United States, sometimes it's interacted in a very dysfunctional way. But I don't think the United States is responsible for the problem. That's much more deeply rooted historically.
You know, you have a very big fan these days. The new president of Syria, I believe, who used to be a jihadi not that long ago, is now like Mr., like neoliberal, like going and like speaking like, I don't know, like the Atlantic Institute and Brookings. And he's like, I read Why Nations Fail and stuff like that. First of all, that's, what's that like?
I'm waiting for the call, you know.
Yes. So this is, let's say he does call. He's like, I really like your book. But now I got to, like, put some of this institution building into practice. Is there a model for like, okay, let's go to some durable, inclusive institutions that he could reach for? Is there another country where it's like, you know what, follow their playbook. That works?
Yeah. I mean, I think that, that's very complicated, you know, because I think, you know, what our research shows. And, you know, the way we've approached this is, you know, if you want to compare all these different countries today and historically, you need a sort of, you need a concept which is sort of flexible enough to cover a lot of details. You know, if I talk about inclusive and extractive institutions, of course, the details of those things are very different. But if you're in the business of actually advising Syria, which I'm not in this business, advising Syria or anywhere else, actually, you know, then all the details...
...because he's listening, your phone line is open.
I'm like, you know what I'm happy to do is, you know, people want to talk to me and they want to ask me questions about what I know and what models might be helpful for them. I'm happy to engage at that level.
But, but, you know, to do anything useful for Syria, you have to understand the details of the politics and the institutions and the society. And of course, I don't.
Well, this kind of gets to one of the criticisms from your famous non-fans, which was Bill Gates, or Bill Gates wrote a book review of Why Nations Fail, and he kind of criticized you for explaining why strong institutions matter, but not explaining how to actually get them. What's your response to that particular criticism?
Well, you know, institutions are a, you know, like, they're an outcome of a sort of political equilibrium, I would say, you know, so, so, you know, our research has been about trying to describe those equilibria and trying to describe sort of historically why some parts of the world got into the situation that they did. And, you know, and so changing them, like, that's something completely different, you know, like, you know, so, so we try to describe historically why societies changed and how they changed. But, you know, the idea that there just be some lever that you pull in Syria, that seems a bit kind of simplistic to me, you know, so, so I, you know, I, you know, he has a very simple view of the world, I suppose. You know, he sort of thinks, he thinks like an engineer, you know, but, but, but social, social systems are not like, you know, they don't like computer programs.
So we started off with like the very aggressive loaded question, is you as fair like, you know, and now we return to.
No, no. Well, no. Yes. Kind of.
We look at the United States these days and people are certainly like, you know, setting aside failing their institutions. Like, people are worried about the future of an independent central bank. People are worried about, like, is our voting system going to be durable and so forth. Like, are there patterns of this? Does this look like anything familiar when you look across the country of, you know, look across the landscape of failed, failed nations?
I mean, you know, I think there's lots of problems in this country, honestly. You know, for me, President Trump and all of that is he, you know, he's a symptom of people's discontent. You know, if you look at data on people's trust in institutions in this country, it's absolutely horrifying. You know, so there are real problems. Lots of people are very unhappy with what's been going on, you know, with their opportunities, with the societies. And in some sense here, you could think of this as a big failure of inclusion in this country. I mean, if you don't have a college degree, you know, which is the sort of narrow majority of people in this country, you know, your income is no higher than it was 50 years ago. It's absolutely astonishing. So that's a failure of inclusion. So there are problems with institutions and they need to be addressed. And I think he's a symptom of those problems. So we need to solve these problems and we need to figure out how to solve them. I'm not sure that he actually has a solution. But, you know, in some sense you have to recognize it as a problem to come up with a solution. And, you know, I don't think President Biden really sort of understood that, you know, and now we see it. And of course, it's a bit nerve-wracking, you know, because part of this, you know, is a challenge to institutions, for sure. But then you could say, well, the institutions aren't working. So let's, let's figure out how to make them better.
You mentioned inclusion just then. And part of your framework is this idea of if political power is broadly distributed or not. What if you get a system where everyone gets a vote, but their political choices are ultimately determined by campaign finance and lobbying, and who controls the media and the narrative that's being spun? How does your framework apply to, I guess, what people would call democratic capture?
Yeah, I mean, you know, I think, you know, so I've done a lot of research on this question of, you know, the impact of democracy on, on kind of public policy and economic growth. And, you know, what we find, I think the evidence is overwhelming that democracy is associated with better public policy, more inclusive public policy, more spending on education and higher rates of economic growth. You know, but, but that's not to say, you know, that there's, democracy varies enormously. You know, there's lots of different sorts of democracies, and some democracies work very imperfectly. They could be corrupt. They could be clientelistic, they could be captured. I, you know, I know, so I think, like, you know, I do tend to think that there are, those are issues, you know, like the enormous amount of money, you know, hundreds of millions of dollars that's thrown into these elections, you know, is, is a problem. You know, for me, like, the biggest problem with inequality is actually the way it spills over into the political system rather than, you know, just in terms of the economy.
