Misconceptions make Acemoglu’s analysis flawed
Daron Acemoglu has been invited to hold the coming Tinbergen Lecture. The journal ESB preludes on this occasion and has published an interview with him: relevant questions; his answers are disappointing, however. In this short essay I’ll show what is the problem in his work.
Theme
His research deals with one of the most intriguing problems in economics: which factors are critical in the question which countries show sustainable wealth and growth and which countries do not. The literature shows several answers (Acemoglu, Robinson 2012):
- Geographical circumstances;
- Prevailing culture;
- Institutions.
The first factor is considered not important. The productivity of land is determined by the owner structure more than by its physical possibilities.
The second factor is considered unimportant, since it is just endogenous to the third factor, which is the institutional framework. In other words, institutions affect culture, and not the other way around. This idea is derived from the typical neoclassical analysis, saying that in a world of hominem oeconomici, all try to increase their wealth by means of sustainable technological growth (Acemoglu 2008). In this causal chain it is irrelevant to discuss what is meant by the concept ‘culture’. By adopting neoclassical economics, Acemoglu abstracts from important phenomena, such as irrationality and social conflict: behaviour is always and everywhere economically motivated.
The third factor is assumed to be the key to success. In case of a powerful elite extractive institutions evolve, which exploit the mass of the people. In case of a more democratic order, there are possibilities for the people to limit the power of the elite. Then more inclusive institutions are developed, with the consequence that wealth is spread among the people – in other words more people are included and can profit from a growing economy.
Analysis is unrealistic and inconsistent
We have seen that neither geography nor culture matters, because institutions matter. Moreover, institutions should create incentives for people to maximally develop an ongoing flow of beta-inventions.
It is remarkable that Acemoglu ignores the original institutional economics as developed by Veblen, Commons, Clark, Searle, and Hodgson. The problem is even worse: he does neither use behavioural economics (Kahneman) nor social economics (Sen, Keizer) nor economic sociology (Weber, Fligstein, Bourdieu, Lenski). All the concepts, which play a pivotal role in his analysis are badly defined. At last he is confusing the orthodox-economic concepts, such as investments and consumption with the same terms as used in the empirical world.
When Acemoglu discusses technology, he means beta-technology. However, if we want sustainable economic growth we also need to work on alpha- and gamma-technology, which are very complementary to the beta-part. We need improvement in our psychological knowledge to increasingly control the aggression inside our selves. We need improvement in our sociological knowledge to increasingly control inter-human aggression. And, of course, we need improvement of beta-knowledge, which makes it possible to increasingly control natural forces. If we focus on beta-knowledge only, control of natural forces will be abused to destroy each other, thereby essentially destroying our selves.
Extractive institutions refer to monopoloid market structures, making it possible for the owners to extract the monopoly rents. But what does Acemoglu mean by inclusion? All the people, or just the people with profitable skills? His analysis does not give us a solution to the problem of a single mother with two children: does society cuddle her when giving her an allowance benefit, as happens in North-west Europe (the term ‘cuddle’ comes from Acemoglu), or is this benefit an investment, that contributes to long-term economic growth?
As already said, Acemoglu does not systematically analyse the concept of culture. To suggest food habits as an important indicator of culture in the context of an explanation of sustainable economic growth, is simply ridiculizing the role of culture. From psychology and sociology we know that culture, and especially the existence of many subcultures, are key to human behaviour (Hofstede, Bauman). The financial crisis of 2008 shows it clearly (Keizer 2015, 2016). To put it shortly, culture is about the way people frame and understand the world. On the basis of this ‘map’ people develop an idea of the main goals and instruments, that make their lives more meaningful. Once a set of instruments is chosen, these evolve into institutions. In other words, there is a close conceptual connection between culture and institution.
In the interview as published in the ESB Acemoglu also discusses his comparison between the institutions of Sweden and of The United States. As said he is using the neoclassical analysis, as we all know a partial analysis about the economy. The psychic-social bedding of the real-life economy is ignored, with all the consequences for the map and the goals and instruments of the people. Sweden shows cuddly capitalism, while the USA is showing cut-throat capitalism. When looking at the world stock of beta-innovations, the USA has contributed much more to it than Sweden, which apply the innovations of American origin – Acemoglu calls this behaviour parasitism. By constantly working on the institutions of the consultation economy and the welfare state Sweden and other countries of North-west Europe are applying alpha-gamma innovations, necessary to produce social peace and justice. The Americans can apply it by just copying North-west European culture and institutions. They are not doing it, thereby accepting a relatively low level of social peace and justice. Research has shown that trust societies have the highest scores on the Human Development Index.
Judgement
Neoclassical economics takes orthodox economics as theoretical foundation for its empirical research. The founders of orthodox economics – Mill, Menger, Walras, Pareto, Robbins – disagreed with this practice. By saying that all actors are perfectly rational and non-social orthodox economics delivers a partial analysis, abstracting from psychic and social problems. In Keizer (2015, 2016) we find a more realistic paradigm and analysis by integrating the three primary aspects. This integration gives a more realistic context, in which concepts such as culture, institutions and technology are functioning well.
A last problem in the work by Acemoglu is the gap between theoretical concepts and their empirical manifestation. Economists have developed a language, which is powerful. However, almost all empirically orientated economists are using data bases, which are developed on the basis on a judicial distinction. Firms and workers do not consume, they invest and produce. Households do not invest and produce, but consume. In the Anglo-Saxon world governments are supposed to be households, not firms. In real-life this is definitely not the case. At several points researchers break through this habit nowadays: women raising children, for instance. But in the analysis of Acemoglu the empirical indicators of culture, institutions, technology and well-being are highly biased. Sweden is blamed for parasitism, although they have produced relevant knowledge and experience in the sphere of alpha-beta-technology – thereby showing how to get from extractive to more inclusive institutions. And that was exactly the main research problem of Acemoglu.
References
Acemoglu, D. (2008), Introduction to Modern Economic Growth, Princeton: Princeton University Press.
Acemoglu, D., J.A. Robinson (2012), Why Nations Fail, London, Profile Books Ltd.
Acemoglu, D., J.A. Robinson, Th. Verdier (2012), Can’t we all be more like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World, Working Paper 18441, National Bureau of Economic Research. Dit paper verschijnt in 2016 in het tijdschrift ‘The Journal of Political Economy.
Keizer, P. (2015), Multidisciplinary Economics, a Methodological Account, Oxford: Oxford University Press.
Keizer, P. (november 2016), Hoe de crisis het economische denken verandert; rechtse en linkse dogma’s ontrafeld, Amsterdam: Amsterdam University Press.
Piet Keizer
Associate Professor of Economic Methodology
Utrecht University School of Economics
21-10-2016
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Piet Keizer 