306. The world’s most influential economist: Tax wealth and break up big tech

0:00Robert Peston:We live in an era of political crisis and economic crisis. Flatlining living standards have undermined confidence in the way we've governed ourselves in the West, in the so-called system of liberal democracy that for most of the past century made us richer and happier. So how do we revive the fortunes of those on lower incomes and restore political stability? Daron Acemoglu, a Nobel Prize winner who's arguably the world's most influential economist, thinks he has the answer. He calls it working class liberalism and he's written about it in an important new book, What Happened to Liberal Democracy?

0:34Robert Peston:What's the biggest problem? And can we rescue ourselves? Here's my interview with Darren Asimoglu. This episode is brought to you by Octopus Energy. Greg Jackson, the CEO, is with us now. Greg, I want you to look into your crystal ball and tell me what's your vision in terms of let's say 10 years for how the average uk house will be powered as we build out more and more renewables on the grid the underlying electricity system is much more volatile and that means that people have got their own solar panels their own batteries can help balance the grid and cars are going to be doing that as well so you're going to end up with a system that looks a lot more like the internet where everything is automatically improving just like in the internet improves your bandwidth here it'll be improving your energy cost and prices are going to come down and by the way it brings prices down even for those people who don't have the solar panels and batteries or the electric cars because it makes the whole system more efficient for everybody let's hope that's right then greg thank you now on with today's episode for adults with crohn's disease or ulcerative colitis symptoms every choice matters trimphaya offers self-injection or intravenous infusion from the start.

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3:21Robert Peston:Darren, it's an absolute thrill to be with you. And I must say, I've massively enjoyed your new book. I want to kick off by going to, I suppose, the biggest, one of the biggest questions raised in your book, which is all to do with the crisis of liberal democracy democracy and how we fix it. If you had to, in a sense, wait, you know, in terms of where, you know, the causes of the crisis, the fact that in countries like the UK and the US, those on middle to lower incomes have seen no rise in their living standards for, well, Well, in the case of the UK, 15 years, in the case of the US, even longer versus what you call essentially the failure of the elite to essentially build consensus.

4:17Robert Peston:In fact, essentially adopt this rather paternalistic, they know right approach to governance. Which of the two would you say is more important in terms of causing the crisis we're in? I would say that the two are united by their cause, which has to be assessed as part of the crisis of liberalism, which I refer to as the rise of post-industrial society. So it was post-industrial society that ushered in a new era, which made shared prosperity one of the founding promises of liberalism and liberal democracy much harder, and also changed the nature of coalitions and the power of different social groups in society, especially among those supporting liberal ideas.

5:13The two have worked together in my assessment, but I want to emphasize that none of this is inevitable in the sense that post-industrial society didn't impose on us greater inequality. It shut off some of the most potent pathways for shared prosperity that existed in the industrial society, in particular companies under democratic governance and under the watchful eye of the labor movement, expanding while also hiring workers and thus paying them more and being forced to treat them better. that pathway was closed because in post-industrial economy, you could automate and get digital tools, robots, and now AI, do the tasks that workers used to perform.

6:11And that really was a sea change. But it also fundamentally changed the nature of who has more say and what sort of coalition would form to support liberal democracy. Thinking of, for example, the Labour Party in the UK or the Democrats in the United States, they had support both from segments of the educated group that was more left-leaning and the labour movement and some other groups in society. That really changed with the college educated becoming much wealthier, much more socially influential, much more important to the production process, much more numerous, but also critically more segregated in how they lived, where they worked, where they socialized, who they married, and thus becoming more and more alienated from the working class.

7:10And those, to me, are the causes of sins of omission and sins of commission of liberal democracy.

7:18Robert Peston:Darren, one of your most compelling arguments is that we should not be fatalists when it comes to the rollout of new technologies, that we do have the ability in a revolution like the digital revolution to actually shape what's done with it so that it doesn't necessarily lead to vast job losses or the suppression of wages, despite what many of our leaders have believed over the last 30 years. Tell me why you are more of an optimist than, let's say, the likes of Blair and Brown. Among many policymakers, public intellectuals, the people who influence public opinion in Davos or other elite gatherings, there is this sort of view that somehow technology is inevitable.

8:03And when technology changes society with its inequality consequences, we just have to live with it. I think that's completely wrong. First of all, technology doesn't come with a pre-programmed social impact. We decided social impact and how we use it, but even more importantly, in how we develop it. So, indeed, the great increase in inequality that we have observed, in the United States especially, but also in other advanced nations, being due to technology doesn't mean that it absolves policymakers. In fact, I think it makes them more culpable because they just sat back and did nothing about it.

8:42And I think that is part of what I call the sins of omission of liberalism. So creating a new governing philosophy for liberalism, which involves a new way of shepherding technology, I think are one of the most important lessons I draw from that.

9:00Robert Peston:There is a sort of cliche in economics that there is no sustainable rise in living standards without rises in productivity. And that often gets translated into the idea that it's all about increasing productivity. And of course, increasing productivity is incredibly important. But one of the most striking and in some ways disappointing and shocking trends over the last, let's say, 30 years is that that link between productivity increases and the wages of working people has to a large extent been broken. And so I suppose the question is for you, why was it broken? And given that we've got to get productivity up, how do we restore that link?

9:45Yeah. So I think the way you put it, Robert, is exactly the right way. The first part of your statement is correct. You cannot have an increase, a sustained increase in the real wages of workers without a sustained increase in real productivity. Otherwise, companies would start losing money. They wouldn't hire those workers. But the converse isn't true. An increase in productivity does not automatically translate into an increase in real wages. And I mean, in the past, you used this analogy or this story that is often mentioned. It's not in the current book, but it's sort of the joke about the factory of the future would have two employees, a man and a dog.

10:38The man is there to feed the dog, and the dog is there to make sure that the man doesn't touch the equipment. So imagine that factory. It's not a reality yet. We're not there yet. But imagine that we are moving to it rapidly. And indeed, with robots and now AI, we may be moving rapidly towards something like that. Well, that factory has huge productivity, but of course, it won't pay to that man and his dog. They're completely dispensable. That's part of the joke. So why would they share those productivity gains with the workers? And the difference there is between workers' contribution to productivity being large versus workers just being there while equipment, machinery, algorithms are the driver of productivity.

11:29I think that's very different. But it is, again, not something imposed on us by the nature of technology. It's a choice about how we use technology, how we organize technology.

11:38Robert Peston:It is absolutely correlated, this discontinuity of productivity and wages rising with the Thatcher-Reagan crushing of trade union power and the ability of working people to organise. eyes, the view of Thatcher and Reagan, which indeed was actually taken up by much of the center-left, Clinton and Blair, for example, was that union power throttled innovation, throttled investment, and therefore that broadly these reforms were wholly necessary. But I think we have to, don't we have to review some of that now? Absolutely. We have to review that. The way I would put it is very much what Lord Acton understood.

12:29Absolute power corrupts and absolute power corrupts absolutely. When corporations empowered by technology or policymakers have too much power over labor, that's not good. When labor has too much power, that can be bad too. We've seen that in the UK more clearly than anywhere else where unions stopped new technologies. They prevented the reorganization of labor or work. But look at other places such as in the Nordic countries or in Germany. you see that technologies could be used in a different way, still productively, when unions are present. Unions were important, for example, in convincing German manufacturing firms that when they introduced robots, they shouldn't lay off workers.

13:27Instead, they should retrain them for more technical, more productive jobs, which was very important for wage growth in German manufacturing industry. Of course, it helped that those workers were already trained, sometimes two or three years in apprenticeship programs. Germany had labor shortages. All of those were contributing factors. But it highlights, as the experiences from Scandinavia do, that how we use technology is a choice. It certainly does.

13:53Robert Peston:But I think you also take the view that in a sense, it's too late for countries like the US and the UK to import, you know, Germanic or Scandinavian sort of corporatist trade union approaches to managing the economy. me. So I guess the question is, are there other ways, other than through traditional trade unions, within an economy like Britain or America, within the private sector, actually, as you know, as somebody who follows the UK quite closely, public unions are still reasonably powerful within the public sector. But within the private sector, how does one increase the ability of working people in, you know, your working class liberal democracy, the kind of, you know, your vision for how to save liberal democracy?

14:41Robert Peston:How does one empower working people to get a bigger share after decades of their share of national income declining? Well, that's a great and central question for me, Robert. But if I may, let me take a step back in order to answer your question. What is the promise of liberalism? Or why was liberalism a big success for a century? I think several ideas are very important to bear in mind. One is the emphasis on shared prosperity, and that's what we've been talking about. The second is liberalism's commitment to freedoms that are valuable in and of themselves, but also a conduit for society to experiment with new things, come up with new technologies for material betterment, but also new norms and institutions and arrangements for our social betterment.

15:40I think those are absolutely critical, and that's why a broad coalition that makes compromises is critical in support of liberalism and its institutional embodiment, liberal democracy. That's what the Labour Party achieved. That's what the Social Democrats in Nordic countries achieved or in Germany. That's what the Democratic Party achieved. For example, FDR's New Deal coalition consisted of left-leaning college graduate intellectuals, the Labour movement, but also Southern Democrats. That kind of melange is actually quite important. Now, social democracy and what the Labour Party in the UK, I think, were a very successful way of building the institutions and that coalition in an industrial economy.

16:31I don't think that would work in a post-industrial economy. If you look at the labour movement as it was constituted, it always emanated from, except in the public sector, and there are problems with public sector unions that private sector unions are very different than public sector units. But in the private sector, it emanated from manufacturing firms. It spread from there to non-manufacturing. But non-manufacturing, the higher turnover industries, they weren't the natural base of the trade union movement. And also the divisions, the social cultural divisions were very different in the early 20th century than they are today.

17:12And that's why I call for a new governing philosophy, which I'll call working class liberalism. It has the same commitment as social democracy to shared prosperity, jobs, wage growth, which are critical for our for building a successful fair society as well as for liberal democracy. But also a renewed emphasis on freedom of speech, freedom of self-government, which is absolutely important. That's what labor unions were about. That's what local communities were about. Greater toleration for cultural diversity of all sorts, both from the conservative and the progressive end. And working class liberalism can thus create a big tent.

17:56And that's very, very important because I believe, Robert, that the center left cannot stand without the working class. That's almost an oxymoron in some sense to anybody who sort of was in the labor movement in the first half of the 20th century or in the 1950s. But today we have a left that's really without the working class. In the UK, in the US, in Germany, in France, and pretty much every advanced economy for which we have data, it is the college graduates, especially those in urban centers who support the center left, the Labour Party, the Democratic Party, the Social Democrats, and the working class, those without a college degree, those working with their hands, they support the center-right or the hard-right.

18:40That is not a tenable equilibrium. And that's why we need to broaden the tent of the center-left. And that's why I suggest a working-class liberalism as a governing philosophy.

18:52Robert Peston:And just very briefly on a definitional point, when you talk about the working class, you are not talking about exclusively those who work down the mines or in manufacturing, because obviously in an economy like the UK, that's like 10 % of the economy. What you're talking about is pretty much anybody. That's why I'm saying it's not just a blue color. In the US, that would be a W-2. You get most of your income, all of your income from a W-2, sort of salaries and wages paid by a corporate. But we have seen, Dan, this astonishing, I mean, we have to go back to the 19th century to see the accumulation by limited numbers of people of dynastic fortunes, You know, whether it's a Musk or a Bezos, these individuals are accumulating both wealth and power on a scale we hadn't seen for more than 100 years.

19:45Robert Peston:We can't rely on the goodwill of these individuals to suddenly decide that, you know, it's in, you know, that they're going to share the fruits of their winner takes all networks with the rest of us. So, I mean, I suppose the question I'm asking you is, I think many people listening to this will absolutely warm to the idea of working class liberalism. But they'll be asking the question, what's the guarantee that given the unfair distribution of wealth and power, that any of this can be delivered? The extent of inequality we are experiencing right now is unparalleled. Even when you got back to 100 years to the so-called gilded age in the United States or the time of British aristocracy, you haven't seen anything like it.

20:33The power of these corporations is really unparalleled. A back-of-the-envelope calculation I did suggests that the revenue of each one of the largest seven corporations today in real inflation-adjusted terms is about twice the total GDP of the British Empire in the middle of the 19th century.

20:57Robert Peston:Sorry, say that. Sorry, say that again. Sorry, that's astonishing. Just talk me through that again. That's astonishing. So if you make an inflation adjustment for the GDP of the British Empire in the middle of the 19th century, it's about half of the real revenues of NVIDIA, Google, Amazon, et cetera. That's really, really striking. Each one of them. Each one of them is about twice the size. So these are really, really powerful corporations. Now, when we talk of inequality, I think there are three aspects to it that we have to bear in mind. And I think all three are very important. One is what we have focused on so far, which is that we need the bottom half to also share in the benefits.

21:47That's what's really failed in the UK. and it has failed spectacularly in the US, where the bottom half actually have seen declines in their real incomes from around 1980 to the mid-2010s. The second is the inequality at the very top, and that's what you pointed out. You know, trillionaires, people who have fortunes close to a trillion or exceeding a trillion, Those are really unheard of and hard to imagine quantities. And then the third is the power of corporations. Because after all, inequality of power is what we are afraid of. Part of the reason why$1 trillion of wealth is so difficult to live with is because the person who has that has huge social power, social influence, political power, access.

22:43and you can no longer have a level playing field. So we have to deal with all three of the problems. And how can we deal with them? Democracy. There's a catch-22 here, I'm afraid. I have to confess. I am saying that we need to get rid of these inequalities and form this broad coalition supporting shared prosperity in order to make liberal democracy work. But the only way we can take steps towards that is using our current democratic system. And our current democratic system is weak, frail, and getting weaker. So that's why the crisis of liberal democracy is as urgent as anything. It's as urgent as the issue of AI.

23:27It's as urgent as geopolitical balances. Because if we do not use our democratic voice, which still exists in the UK, it still exists in the US, though much weakened. And if we do not find a way of forming compromises to form this coalition committed to shared prosperity and to a fairer way in which voice and self-government are exercised, it's going to be too late.

23:52Robert Peston:Darren, we're only at the tip of this particular iceberg and I want to dig below the waterline. So we'll be back in a minute or two.

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25:38Robert Peston:Aspect of all of this in America, you have a president who is essentially an enabler of the trillionaire class and seems to be governing with the express intent of trying to join them. And you've got in the UK, a succession of governments who are just terrified of the trillionaire class. Given the fear of many Western leaders of these trillionaires, we've got a new Prime Minister, Andy Burnham. What would your advice be to him in terms of how he manages the relationship with these trillionaires and these incredibly powerful corporations. That's absolutely central. But the challenge is deeper because we live in a polarized society and you have to manage both wings.

26:25Part of the reason why the UK appears ungovernable is that Labour prime ministers have to also cater to the wishes of their base. And that's why we need a broader coalition that is committed to shared prosperity and committed to keeping billionaires to account, and at the same time, also doesn't get swayed by the cultural politics or other issues that would alienate a critical part of that working coalition, the working class. So I think on the part of keeping billionaires to account, it is very important that we start taxing their wealth and income. especially on the income part in the United States and to some extent in the UK as well, we just don't tax capital income.

27:23That's not just unfair. It is also highly distortionary because when companies use labor, they pay higher taxes. When they use capital machinery algorithms, they pay lower taxes. That creates an artificial inducement, inefficient artificial inducement to automation. But we've also failed to tax their incomes for so long. And we have failed to uphold antitrust that has enabled some of these companies to grow to this size. So we have to sort of go back and think about that. I think moving forward, we really need to be much firmer on antitrust. That's the way you can keep these companies in check to be consistent with the democratic principles.