Letter from America: A dangerous and hopeful time

19 Oct 2021

This is my first Letter from America and, admittedly, I have some big shoes to fill. Angus Deaton is a true luminary of our profession and has done a tremendous job in this role, at once bridging the two sides of the Atlantic and critically evaluating the state of society and academia in America. Daunting as this task is, I will try.

Fortunately for me, there is much to write about. James Robinson and I defined a “critical juncture” as a situation in which existing institutions have proven incapable of dealing with current challenges, and there is much uncertainty about the direction that institutional change will take. It is a dangerous and hopeful time — dangerous because we are on the verge of a crisis, and hopeful because there is still some degree of agency, deliberate action and choices, that are available to us.

Both Europe and the US are at a critical juncture today. It is not one that has been created by Covid-19, but the pandemic has both elucidated and accelerated some of the changes underpinning this critical juncture.

There are many aspects to our current predicaments. A central problem that has been highlighted by the pandemic is the non-shared nature of economic growth on both sides of the Atlantic. In the US, workers with postgraduate degrees and specialized skills (for example in IT, entertainment, or management) have seen their earnings multiply over the last four decades, while those with high school education or less have experienced significant declines in their real wages.

This sharp divergence between the top and the bottom is an almost uniquely American phenomenon. But many other advanced economies have experienced notable increases in inequality as well. In almost all of them, middle-class jobs have become much scarcer, and blue-collar jobs and clerical occupations have started disappearing. In almost all of them, managers and owners of large firms have become much richer. In many of them, we have seen these inequalities translate into hugely divergent outcomes during the pandemic.

Simultaneously, Western societies have produced mega companies that are powerfully impacting people’s lives, much more so than what we have been used to over the last 80 years. Companies like Amazon, Facebook, Google, and Microsoft are not just huge in terms of how much of the economy and their sectors they control and how insanely rich they have made their founders, they are also ever present in our lives and they possess an unparalleled amount of data and information about us.

Some argue that inequality is the price we have to pay for rapid technological progress and growth, and there is evidence of rapid progress. New widgets are invented every day, many believe artificial intelligence will revolutionize everything, and the number of new patents in the US has quadrupled since 1980. And yet, we are going through one of the slowest periods in terms of productivity growth. If inequality is the price, we are certainly not getting what we paid for.

Societies with strong institutions can withstand temporary economic setbacks and increases in inequality. But when economic growth becomes so unbalanced for so long, no institution can remain unscathed. Something will have to change, and most likely something institutional. But what? How?

Institutional change takes place most successfully within the context of democratic institutions. In the US, for example, it is difficult (at least for me) to imagine how the formative economic and political reforms during the Progressive era and then the even more radical societal changes accompanying the Civil Rights movement could have taken place peacefully, had it not been for democracy. But today, democracy is in retreat around the world.

The political scientist Samuel Huntington dubbed the move towards more democratic institutions around the world, starting with the fall of the Spanish, Portuguese and Greek dictatorships in southern Europe, the “Third Wave”. Many believe that this wave became unstoppable after the fall of the Berlin Wall. Indeed, until about 2006, every year more and more countries were strengthening their democratic institutions and pivoting from authoritarianism to democracy. But since then the pattern has reversed, and every year we are witnessing more democracies falling or having their wings clipped.

It is disconcerting, partly because, despite much ink being spilled on this topic, we still don’t understand this mega-trend. The US literature is filled with stories of why and how Trump came to power (which of course was a huge setback for American institutions). Most of these stories emphasize idiosyncratic, quintessentially American themes (the effects of China, evangelical politics, racial animosity, and so on). But we are seeing similar trends in Brazil, Hungary, India, the Philippines, Poland, Turkey, and even Mexico and South Africa. It is unlikely that these almost simultaneous attacks on democracy all have different causes. Some common factors must be at play. But what are these factors and why are they proving so difficult to identify? Non-shared growth and the unravelling of democratic institutions in many diverse parts of the world are not the only destabilizing trends. Climate change has become an existential threat for the globe, and like our other challenges, it will likely pave the way for fundamental institutional changes. Yet, we are currently in denial about the severity of the problem (and how little we have done to confront it)

All of these challenges are global, and so are many others, including pandemics and the potential proliferation of nuclear and autonomous weapon systems. Yet we are also seeing the unravelling of global institutions. At this juncture, when we should be working to build better global institutions, we are tearing down those that existed and damaging the modicum of global cooperation that had emerged over the last several decades.

These are social, economic, and political problems. We should be worried and proactive about them, as citizens of the world and as economists. 

Abba Lerner noted in 1972 that “Economics has gained the title of queen of the social sciences by choosing solved political problems as its domain.” Alas, the huge progress that economics has made as a social science has indeed come at the expense of sometimes looking under lampposts.

If I am right that we are living through a critical juncture, this is a luxury we can no longer afford. And this is true on both sides of the Atlantic.

Daron Acemoglu, 3 September 2021