In his library, NES rector Ruben Enikolopov has books about the most fundamental economic problems. How a society can find its path to prosperity, how we can enable all the people instead of just the most successful group move along this path, how we can help those who do deserve to be in this group but for some reason fall out? How to make technology work for the prosperity of society instead of the new ruling class, and to return the true essence of capitalism?
Ruben shares four selections of books each having a series of works arranged in such a way that the readers move from one to the other, asking themselves difficult questions and trying to find their own answers.
Gilgamesh, Leviathan, the Glorious Revolution, Adam Smith, the great European wars: what would happen if you put them all together? In the first selection of books from Ruben Enikolopov, these unrelated names, myths and events help to find an answer to the eternal question: how can society come to prosperity? He recommends reading these books exactly in the suggested sequence.
Step one is the bestseller Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012), written 10 years ago by renowned economists Daron Acemoglu and James Robinson. It has become so popular that it can already be considered a classic. And it is a pleasure to read thanks to interesting historical cases and comparisons.
Acemoglu and Robinson consider political and economic institutions to be the main factors for societies’ prosperity, distress and even collapse, while all other factors (for example, geographical or cultural) are secondary. Institutions can be good and bad: inclusive institutions allow the whole society to enjoy the benefits of development, extractive institutions aim to provide rents for the elites. Countries with inclusive institutions thrive, while those with extractive ones only languish and perish (the authors managed to find such cases even in the Mayan civilization).
Political institutions are the key to the emergence of proper economic institutions.
- Extractive political institutions allow elites to create economic institutions that provide them with rent. And the larger the rent, the greater their political power, which, in turn, increases the rent. Therefore, the elites are interested in maintaining the status quo.
- Proper institutions, on the contrary, reproduce inclusivity in politics and economics.
To break away from the vicious circle of the extractive environment, the political regime needs to be changed. "That is the key to eliminating poverty and ultimately getting to prosperity". Economic growth will only occur if it is not blocked by those who are afraid of losing from it and losing the privileges on which their wealth and power are based, Acemoglu and Robinson write.
They find confirmation of this theory (which goes back to the Nobel Prize winner Douglass North) in a variety of societies – from ancient to modern ones. The main question that remains after reading this book is why some countries live with good institutions, while others live with bad ones. Two other books that I would like to recommend lead up to the answers.
The first one is The Narrow Corridor: States, Societies, and the Fate of Liberty (2019), again written by Acemoglu and Robinson, and an equally fascinating book full of historical references.
Its main idea is simple: modern society needs strong state institutions. We can argue which type of state is better – democratic or autocratic, but there is nothing worse than the absence of state when society falls into a "war of all against all". Afghanistan or the Democratic Republic of Congo are examples of these disastrous cases. Acemoglu and Robinson ask how to go along a narrow corridor with society’s need for a strong state on one side and the state suppressing freedom on the other. How to find a way between two extremes – an absent Leviathan and a despotic Leviathan, so that there appears a restrained Leviathan – the inclusive institutions discussed in Why Nations Fail?
The solution is in a balance between the power of the state and the ability of society to control this power: "Freedom is born out of the fragile balance of power between the state and society." This balance is found in the constant rivalry of society and the state: they should race like the Red Queen from Through the Looking-Glass, i.e., very, very fast. This race ensures that the strength of both society and the state is growing, so that the latter can better meet the needs of society. Competitive efforts of society are necessary to restrain Leviathan, and the more powerful and capable Leviathan is, the more powerful and vigilant society should become, the authors write, adding that Leviathan must also race, expanding its capacity in the face of new threats and for the sake of preserving its own independence.
Acemoglu and Robinson turn to the ancient epic of Gilgamesh, a historical king of the Sumerian city-state of Uruk. "Who can compare to Gilgamesh? <...> He is the king, he does whatever he wants, takes the son from the father and crushes him, takes the daughter from the mother and uses her. <...> No one dares to contradict him." The citizens pray to Anu, the goddess of heaven: "Oh, heavenly father! Gilgamesh <...> has crossed all limits. People suffer from his tyranny. <...> Do you want the king to rule in this way?" And then the gods create Enkidu, who must restrain Gilgamesh. Acemoglu and Robinson see a symbol of the system of checks and balances in this epic. But did this system work in Uruk? No, Gilgamesh and Enkidu fraternized.
The system of checks and balances imposed from above usually does not work, Acemoglu and Robinson conclude. Freedom is not granted by the state or elites that control it. It is won by ordinary citizens, society as a whole. And it requires a mobilized society that can participate in politics, protest when necessary, and, if necessary, deprive the government of power by voting in elections, the scholars say.
To some extent, the United States and Western Europe have succeeded in this development, according to Acemoglu and Robinson. But why did they manage to do that? Why did one country manage to restrain Leviathan, and the other did not? And why are some nations poor and others rich? The Narrow Corridor again does not provide an answer to the question “why?”. You can look for it in another work that was published before both books by Acemoglu and Robinson. It is Pillars of Prosperity: The Political Economics of Development Clusters (2011), written by professors at the London School of Economics and Political Science Timothy Besley and Torsten Persson. This book is methodologically more solid compared to The Narrow Corridor.
It shows that a prosperous country emerges out of a unique combination of several factors, and if one of them is changed, the country can fall into a dictatorship or another extreme of the "war of all against all". To paraphrase Leo Tolstoy, we can say that all happy states are all alike, every unhappy state is unhappy in its own way. The three components of this happiness were formulated by Adam Smith: raising the state from the lowest level of barbarism to the highest level of prosperity only requires peace, bearable taxes and tolerance in governance; the natural course of things will do the rest. The first pillar is peace, the second is an effective state, i.e., bearable taxes and effective justice.
In order for these pillars to support prosperity, there should be institutions that increase the power of the state and at the same time limit it, Besley and Persson write. The key to their appearance is the presence of common interests of society. They can be different, say, armed conflicts. Moreover, Charles Tilly, an American sociologist and historian, believed that it was the constant threat of war with neighbors that explains the reasons for Europe's prosperity.
Last summer, Besley and Persson published a paper Pillars of Prosperity: A Ten-Year Update, in which they updated their prosperity index using more recent data. Their findings are nicely presented in the article on Vox EU.
It is also worth reading the research by Acemoglu and Robinson on the influence of culture on economic development, in which they recognize that culture still matters, and try to find its relationship to institutions and social phenomena. They define culture as a set of cultural attributes and connections between them. The cultural configurations formed due to these relationships can change and adapt to the environment. Culture and institutions, Acemoglu and Robinson write, are like siblings, influencing one another.
The next set of books is about fundamental problems of the modern economy, such as the growth of inequality. Perhaps, they are immanent in the very nature of capitalism, but this does not mean that these "diseases" do not need to be treated. Why is inequality growing, and what can and should be done about it? Ruben Enikolopov recommends a series of books that provide answers.
French economist Thomas Piketty, author of Capital in the Twenty-First Century ("Le Capital au XXIᵉ siècle", 2013), is often compared to Karl Marx. His book is a fundamental study of the evolution of capital and its accumulation in private hands, which covers the period from the beginning of the 18th century.
With the end of the "Glorious Thirty", thirty-year period of economic growth between 1945 to 1975, the role of capital, and with it inequality, began to grow, Piketty argues and confirms that with the help of a huge array of data. It is the incredible empirical work that makes this book unique and that is its strongest point. The weak side of the book is its methodology: many of its theories have been fiercely criticized by the academic community. Also, the book has evoked a larger response from non-professional community rather than from professionals.
Nevertheless, this is a very fascinating work, a new milestone in the research on inequality (you can also watch a movie about this book and check out the database on inequality). Piketty himself admitted that the answers he offered to the question about the causes of rising inequality were imperfect and incomplete. You may still have this question unanswered after you read this work. Perhaps, two other books that have been published recently will help to find answers.
The United States is a country of developed competition, free markets, unlimited opportunities, and there is no better place to do business. These ideals that defined American identity are in the past, Thomas Philippon, professor of finance at the New York University Stern School of Business, writes in his book The Great Reversal: How America Abandoned Free Markets (2019) that was also recommended by NES Professor Konstantin Egorov. They collapsed under the pressure of lobbyists. Large corporations seized public, political, and economic institutions, putting them at their service.
This fact rather than some immanent problems of capitalism or globalization, explains the key problems of the American and other economies. Less, but more – that is what happens in many countries, but it does not at all mean any improvement. By privatizing power, the largest corporations protect their market power, restrict competition and block new market entries. They use their profits to do that rather than invest in development and innovation, which could lead to an increase in general welfare. A decrease in competition results in higher prices and inequality, and lower general welfare. Philippon calls on the American administration to return freedom – the driving force of their development - to the American markets.
Charts illustrating the situation in the US and European markets are available here.
Philippon's book is perfectly complemented by the work of Jan Eeckhout, Ruben's colleague at the University of Barcelona, The Profit Paradox: How Thriving Firms Threaten the Future of Work (2021), which was also recommended by Sergei Guriev. It has a dedicated website with data and tools for plotting.
The conclusions in these two books are very similar, but Eeckhout refers to cases of certain firms. He sees the reason for their profits growth in the growing monopolization of markets. The paradox is that with the growth of profits, corporations have diminishing incentives to invest their revenues in development – it is more profitable for them to invest in their market power.
Why do the things that Philippon and Eeckhout write about happen? The answer to this question can be found even in the works of Karl Marx: this is a natural evolution of large capital. As soon as a firm reaches a certain size, investments in market monopolization turn out to be the most profitable. The state represented by an antitrust authority should oppose this natural desire of firms. Philippon and Eeckhout show that antitrust regulation in Europe, which is tougher than in the US, ensured better outcomes with higher competition and lower market entry barriers translating into a positive effect on the population’s wellbeing.
This natural evolution of capitalism is also discussed in Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity, written almost 20 years ago by renowned economists Luigi Zingales and Raghuram Rajan. Both of them were born in countries with a high level of corruption, where business and political power merged: Zingales – in Italy, and Rajan – in India (for several years he was the governor of the Central Bank of India).
The main idea of the book is stated in its title: since it is natural for capital to suppress competition after reaching a certain size, protecting its profits and investments, therefore, this desire of capitalists becomes a threat to capitalism itself. Capitalism should be protected from being captured by a small number of corporations. This task requires a ongoing solution, which is another example of the “Red Queen” effect: competition always tends to decrease due to corporate lobbying, so it always needs to be supported and protected from capital. Nowadays, the threat comes not from capitalists themselves, but from the CEOs of their corporations.
All these books give fundamental answers to the question that Piketty could not answer: why is inequality growing? On this topic, there is a good book by the British economist Sir Paul Collier, The Future of Capitalism (2020). He argues that over the past four decades, the economic efficiency of capitalism has been declining, and its main advantage – the ability to ensure a steady increase in living standards for all – has been called into question. The problems of capitalism are so great that conditions for the revival of Marxism are ripe, Collier warns.
The next book selection from Ruben Enikolopov is about another global trend – problems generated by progress. It is a trilogy that talks about the impact of technology, automation, artificial intelligence, and social networks on society and our consciousness.
Prediction Machines: The Simple Economics of Artificial Intelligence (2018)
This is unsurprisingly a very business-style book. Its three authors – Ajay Agrawal, Avi Goldfarb, and Joshua Gans – are professors at business schools. They present their work as a practically useful one. "A new book to bring AI understanding to your business," their website says. Artificial intelligence reduces the costs of forecasting, makes forecasts more accurate, and therefore helps companies better choose optimal strategies. Ultimately, AI reduces uncertainty, the authors of Prediction Machines write and try to show exactly how firms can use the new technologies.
The Hype Machine: How Social Media Disrupts Our Elections, Our Economy, and Our Health and How We Must Adapt (2020)
MIT Professor Sinan Aral shows how powerful social media has become to influence our choices. There can be no doubt about the strength of their impact. The main question is: what exactly do we choose under their influence? Do social media unite society or increase polarization? Which information do they make more accessible – reliable or fake?
This fascinating book is written in an easy to read language and offers plenty of cases from marketing and politics; examples of how social media influence social behavior and our minds; how they develop dependence and bad habits in people. The book has many stories about how Russian hackers influenced the US elections. During the pandemic, we could feel the power of social media when offline life froze. I was particularly pleased that the book quotes a full page presentation by my wife (Maria Petrova, professor of NES and Pompeu Fabra University in Barcelona) of our joint research on social media.
The Work of the Future. Building Better Jobs in an Age of Intelligent Machines (2022), David Autor, David A. Mindell, and Elisabeth B. Reynolds
The world is heading to full automation, machines will replace people (in the past machines required a human, today they can operate on their own); we are on the way to total unemployment and social catastrophe. These are very popular apocalyptic scenarios. The book by David Autor, MIT Professor and one of the leading researchers of the labor market, and his co-authors shows that such a gloomy future is not at all inevitable or predetermined. Yes, automation leads to problems in the labor market and in society. Labor that requires cognitive work is being replaced by artificial intelligence, and manual labor is being replaced by machines. But it is not the first time this has happened: once an excavator replaced a digger, a train and a car replaced a coachman, a computer came in place of typists and accountants, and a sail made rowers redundant. Every technological breakthrough has displaced someone's work, and it is not technology itself that leads to social problems.
The authors write about measures that could help solve the difficulties arising from automation. For example, they suggest on-the-job retraining for people whose professions are dying out. This requires professional development and training programs, a blended training system - face-to-face and online.
Autor is a technological optimist, just like me. Technology frees us from boring routine work. You can watch a scene from Modern Times with Charlie Chaplin, showing the work on a conveyor – it is hardly a dream job. The same can be said about routine intellectual activities: it is the same conveyor when you have to add up the same numbers for eight hours a day or check boring documents.
Automation makes it possible for people to demonstrate the ability that only humans have: that is creation of something new. There will be a growing demand for a deep understanding of processes and creativity, these skills are complementary to artificial intelligence which lacks creativity. Moreover, the demand for social skills will grow, and here a machine will again be only able to help, but not replace a person.
The last selection of books is devoted to problems that have become very important in recent years, problems at the intersection of economics and moral philosophy. These are books about justice and ethics.
“Not So Fast You Greedy Bastards!” Michael Sandel quotes this headline from The New York Post in his book to show how outraged people were about the payment of bonuses to bankers at the peak of the global financial crisis, and how unfair it seemed to people.
His book is called Justice: What's the Right Thing to Do? (2009). Sandel, a professor at Harvard University, made a great contribution to the development of the theory of justice. I also recommend everyone to watch his public lectures.
For Sandel, justice is a public virtue, a key value, a good in itself. He deduces three approaches to the distribution of benefits: from the standpoints of welfare, freedom and virtue. Each of them suggests a special way of thinking about justice. Does the word "fair" apply to price? Does it apply to free markets? Where are market mechanisms appropriate and inappropriate? Why freedom without borders is fair for some and a restriction for others? How has the concept of justice changed over the centuries and millennia? For what deeds should soldiers be given medals? In this book, Sandel poses very good questions. He does not always give answers, but there is never a single right answer to questions of ethics.
The huge drawback of Russian education is that it neither gives basic ideas about ethics, nor does it explain how and in what terms to discuss ethical issues. This book would help readers fill the gap.
In his other book The Tyranny of Merit: What's Become of the Common Good? (2020) that was also recommended by Sergei Guriev, Sandel continues the theme of what is good and what is bad, but moving from the level of institutions and markets to the level of people's perception. How can we understand when a person got benefits rightly and when not? And how proud should people be of the things they got undeservedly?
In the US, meritocracy was a key national idea. It was considered a country where a person can achieve everything on his own. But the American dream has already turned into a myth even for Americans. And the growth of inequality has debunked this myth. These days, the chances of losers to win and the poor to become rich are decreasing. The mechanism of social elevators is rusty and works worse than before. Most of the winners' success is explained not by their merits, but by their place of birth, their family and the education they were able to get thanks to the family. This leads to an increase in distrust of the government, polarization of society and creates excellent ground for populism.
Sandel calls for a change in attitude to one's own success and someone else's failure. He shows that success and meritocracy can turn into tyranny. You can also read about this in The Future of Capitalism mentioned above.
The growth of inequality is an eternal problem. At some point, it starts to seem that this problem has been solved and any person can achieve more with his or her own brain and hands, but as wealth grows, barriers to success also rise in society, and competition starts to fall. History repeats itself, but, fortunately, it goes in a spiral and not in a circle. Today, much more depends on the talents and diligence of a person than 100, 150 or 300 years ago. However, although humanity has achieved a lot, we are far from the ideal world and therefore we must remember the shortcomings of society in order to help those who are not as lucky in life.
To sum up, all the books listed above raise ethical questions. How can we make the economy more fair and its benefits available to all members of society? The search for an answer to this question is the fundamental task of economic science.