Episode 362 – Debunking the Institutional Theory of Economic Development with Erald Kolasi

Steve Grumbine:
00:00:42

All right, folks, this is Steve with Macro N Cheese. Today’s guest is a returning guest.

He’s my friend Erald Kolasi, who is a physicist and economist focusing on the nexus between energy, technology, economics, complex systems and ecological dynamics. His book, which we’ve covered here, The Physics of Capitalism, came out Monthly Review press back in February 2025- so not too long ago.
Please go pick it up. He received his PhD in physics from George Mason University in 2016 and is one of my favorite guests here on the program.

And today we’re going to take a trip in a unique direction. It’s going to tie together with some things you’ve heard on this podcast in recent weeks.

In particular, the concept of why things happen in one country differently than in another.

We talked with Vijay Prashad and we talked about Antonio Gramsci and understanding why the Russian Revolution went the way it went versus the way that it went in Italy, why they chose fascism, et cetera.

Well, this is going to be a little bit different because we’re going to be debunking the institutional theory of economic development, which, by the way, you can find an article about this on Erald’s Substack, which I strongly recommend, which is Erald Kolasi. So if you look him up on Substack, you’ll find a treasure trove of phenomenal writing. I mean, just absolutely must read writing.

That said, what he talked about in here was the essence of why one country has good economic outcomes and another does not. And he takes on the concept that if we just have good institutions, everything will go just swimmingly.

Based on a book, a 2012 book, Why Nations Fail, by [Daron] Acemoglu and [James A.] Robinson. And he takes on specifically some of the points that Daron Acemoglu brings up in the book.

And with that, I will go ahead and kind of set the stage with a question.

What is it about institutionalists, in particular, that reduce things down to these kind of hierarchical structures as the reason for the winnings and losings of various countries? And I want you all to think about this in the current lens- as we’re watching what is happening around the world with China, as we’re
watching what’s happening currently with the US with Venezuela, as we watch what happened in the Global South with Africa. And you frequently hear these kind of, “why is Africa failing? Why are they always behind?” And stuff like that.

And I can’t wait to get to the root of all these. And Erald is here to do that. Erald, welcome to the show, sir.

Erald Kolasi:
00:03:32

Hey, Steve, thank you for having me back. I’m so glad to be here.

Steve Grumbine:
00:03:36

Absolutely. So this substack, this post, it’s long, folks, it’s not short.

So break out your reading glasses, get comfortable and read it because it’s worth your time. I promise you we wouldn’t be talking about it here.

My goal is to make this stuff interesting and also to provide you with the ability to put your feet up, get the fireplace going, and listen and contemplate these important subjects. And I think that you’ll enjoy this. So, Erald, help me understand.

Erald Kolasi:
00:04:05

Yeah, absolutely.

So, you know, there’s a really broad intellectual effort out there, and it’s been going on for a long time now, to explain why history took so many meandering twists and turns for different nations, right? Why are some countries rich while others are poor? Why are some countries strong while others are weak?

Why did Europe end up colonizing the Americas instead of the opposite happening, right, and the Americas colonizing Europe? And so there’s a long intellectual tradition and different people writing about this stuff.

There’s people like [Jared] Diamond in Guns, Germs and Steel, and there’s cultural explanations.

So, you know, Jared Diamond would argue, you know, a lot of the big changes that you see in history and a lot of the fundamental outcomes that you see over time, they come down to essentially geographical and ecological dynamics, right? So the distribution of flora and fauna, the orientation of the continents, rainfall patterns and soil quality and things like that, right?

So that’s what Diamond would argue. You have people on the cultural school who would argue, well, it comes down to cultural differences between different societies, right?

The different cultures have different values and those values then translate into behavior, right? And then the behavior obviously leads to different outcomes-
so this would be people like Max Weber and The Protestant Ethic [and the Spirit of Capitalism] that, hey, northern Europe is, you know, richer than Southern Europe because they have a better work ethic, right? And then you have an increasingly popular school of thought as well, institutional economics.

And this is a very broad school that covers many different perspectives and even ideologies, right? I mean, there can be people on the left that are institutionalists and even people on the right that are institutionalists.

But the substack post that you talked about specifically addresses the book Why Nations Fail, written by the economists Daron Acemoglu and James Robinson, both of whom won the [Nobel] Memorial Prize in economics in 2024. Right? So this year it was actually one of the members of the cultural school, Joel Mokyr, who won it.

And I’ll criticize those ideas as well as part of the institutional school in this podcast.

But last year it was, you know, Acemoglu and Robinson, and a major reason why they won it, in addition to all their academic work, their papers, their researches, is because of this book. So this was a very famous book. It’s created a lot of discussions. And so what is their main thesis in this book? If I can just get to that.

So they argue quite bluntly, that the reason countries end up with different economic and political outcomes is because they have different institutions. Right?

So they’ve adopted different institutions, and then those institutions establish certain incentives for people to follow, and then those incentives guide people’s behavior and lead to different outcomes. Right? Okay, so what do they mean by institutions? What they mean by institutions are they call it the rules of the game.

They mean the formal and informal rules which establish incentives for people to follow in society. Right? And mostly in their book and in their research, they actually focus on the formal stuff instead of the informal ones.

There is an older version of institutionalism by Thorstein Veblen. Veblen defined institutions as more like social habits and cultural customs which then again drive people’s behavior in the real world.

But the new institutionalists, they have a different idea in mind. They’re more focused on formal structure. So things like the legal system, right- laws, tax policy, regulations, just political systems and political structures and how they interact with the economic system. That’s what they mean by institution. So just a trivial example would be, you know, recently the electric vehicle tax credit was canceled. It ended in September of this year. And after that tax credit for electric vehicles ended, you had a plunge in electric vehicle sales by like 20% from September to October. Right?

So obviously having that tax credit in place, it was about like $7,500 in most cases, encouraged a lot more people to buy and lease electric vehicles. Right? So that’s an example of an institutional policy, in this case, tax policy, which is then incentivizing people to behave in certain ways, right- to go out there and buy more electric vehicles. In the Great Recession, Congress passed a first time home buyer tax credit. I think it was $8,500.

There’s some evidence to suggest that more people went out to buy homes after that. So these are the kinds of things they’re talking about, right?

Like, not just this, you know, I mostly focused on, like, tax policy, but just broadly formal structures, formal rules and structures in society which guide people’s behavior. And they have a dichotomy between economic and political institutions.

So economic institutions would be things like, you know, competitive markets, private property.

And then political institutions would obviously be things like our governments and the regulations they’re passing and implementing and how those interact with the economic institutions. One thing I do like about their theory is that they do bring politics into it, right? So they’re happy to engage in political economy.

That’s something that has traditionally been lacking in neoclassical theory or mainstream economics more broadly. But the institutionalists are very happy to engage with that, right?

To engage with politics and political economy and to see that economic outcomes, they’re not just the mindless result of economic agents. They also involve political forces. Right?

The institutions of any given society in any given age are fundamentally a reflection of the class dynamics of that society. Right? That’s what I would argue.

They probably wouldn’t put it that way, but they do see this interplay, this interaction, right, between economic and political institutions.

And so then, you know, after they talk about what institutions are, their basic thesis is that countries that pursue inclusive institutions, as they call them, will succeed economically and will have sustained economic growth.

And countries that pursue extractive institutions, as they call it, they may succeed for a little bit, you know, so they bring up examples like the Soviet Union or even China now, which we’re going to talk about later.

But they say if you pursue extractive institutions, meaning that if you have a corrupt elite which is siphoning off wealth from an exploited population, that’s basically how they define that, then those countries are going to stall economically. Right? They’re not really going to go that far. They may have temporary growth, but they’re not going to have sustained growth, like for example, they might say Britain had or the United States had.

And countries that have inclusive institution, their notion of inclusion is highly utilitarian, I would say.

It’s just basically setting up political and economic institutions that include as many people as possible from participating in those institutions. Right? So that’s kind of the distinction they draw between inclusive and extractive institutions.

And they say that once you understand these institutional dynamics, that’s what explains the economic outcomes of history over the long run. Right? That’s all you need to know. You don’t really need to know much of anything else.

They do argue that critical junctures which I would call, you know, things like exogenous or endogenous shocks- so wars, revolutions, pandemics, natural disasters. They do argue that these things can have a huge impact on institutional dynamics.

The critical point in their book is that they seem to treat institutions as a fundamental unit of analysis. And critical junctures only come in to amplify preexisting differences among institutions.

In other words, the institutional landscape is somehow magically set. We don’t know why. That’s one of the major flaws in their theory.

They don’t explain why certain institutions arise in the first place, but they kind of take them as a given. So there’s this landscape of institutions across the world in different societies. And then there’s critical junctures, right?

Like I said, wars, revolution, natural disasters, ecological dynamics, things like that. And then these then amplify these preexisting institutional differences and, and then over time- it’s almost kind of like an evolutionary theory- over time, institutions evolve to essentially what they are now. Right? Some countries end up with inclusive ones, some countries end up with extractive ones. So that is their theory in a nutshell.

And I’ll give one example, Steve, if I could steel man their theory, which I think is the strongest possible example you could give for the theory, and that’s North and South Korea, Right? So Acemoglu and Robinson would say, “look at North and South Korea. They’re on the same peninsula.

So the geographical and the climatic and the ecological factors are very similar. Right? They’re very similar. So you can’t use those to explain the fundamental differences in economic prosperity between South and North Korea.” Right?

North Korea is a tyrannical dictatorship. Most of its people are poor. In recent history, it has struggled with famines. I’m going to come back to that and explain why that happened.

Where South Korea is, you know, generally a prosperous nation, right?

It’s a liberal democracy, competitive multi-party elections, rule of law, an independent judiciary, free markets and competitive markets and you know, a lot of technological innovation. It’s a technological powerhouse. Look how different they are even though they’re right next to each other. Right?

I mean, geographically, they’re right there. Ecologically, it doesn’t seem like there’s much difference there. Right? So why would they be so different?

Same thing, when they attack the cultural school through this example, they would say, “how can cultural differences explain the fundamental political and economic differences between North and South Korea? I mean, they speak the same language, they have the same historical legacy.” Right? Once upon a time they have the same cuisine. Right?

Now, I’m sure they eat different things, but the point is they come from the same historical and cultural legacy. So how can that be an explanation for why they’re so radically different?

So I think that’s the strongest possible example that they could give in support of their theory. And they would say, “well, the reason why they’re different is because South Korea adopted inclusive economic and political institutions.”

And I mentioned some of them already, right, like competitive elections and multi-party liberal democracy and so on, you know, free press.

Whereas North Korea is, you know, a cloistered tyrannical dictatorship where the education system just teaches you communist propaganda all day long. People don’t really have any economic opportunity. You have to go join the army for 10 years after you finish school.

You kind of have to do just what the government tells you. Right? You don’t really have any opportunity.

So they contrast the institutional frameworks between the two countries and they say, clearly the answer is South Korea has adopted different institutions. And so that is sort of like their grand explanation, not just for this example, but I think for the broader outcomes of human history. Right?

It’s that nations that adopted inclusive institutions succeeded. Those that adopt extractive institutions have failed. So I’m going to pause right there and get your take on it.

And then I’m going to get into what I think are some of the main problems with our thesis. Right? Because I certainly don’t agree with it and I think they leave out a lot of important things.

Steve Grumbine:
00:15:00

No, absolutely. I appreciate this.

I think to myself, coming from an MMT perspective and also a socialist perspective, you know, I look at what is the definition of success. You know, I’m also a project manager. So when I start a project, I’m asking myself, what will make this project successful?

And you have to have some idea of how to categorize success.

And so when I think about how would you define any of them as successful or not successful, it comes down to whose class interests are being represented? It’s not a 360 degree view of who’s winning and losing.

It seems to have a very distinct kind of we represent the ruling elite, we represent this group of people’s interests, and this other group of people are kind of left in the background. And I think this is kind of universal.

I think you can look at the United States and people, if you look in aggregate at outcomes and institutions and thought and the way rules are set up, you’ve got a handful of people that really, really do fantastic. In spite of having so many opportunities to choose different kinds of cheeses and have a different soda pop every other day.

And they get to change what kind of car they drive, and they get to pick the colors. And my God, they got so much freedom. Right? That’s a fake institution right there.

But it’s an institution the US claims is there, but in reality, it represents the ruling class. And you can see that very clearly. It’s not in the Constitution.

“The rich should be the richest and the poor be struggling so that they can provide services for the rich.” You know, there’s nowhere it says that, but that’s the outcome. So how do you measure an institutional arrangement with an outcome?

I mean, I hear people literally talking constantly about how “well this administration has failed.” I’m like, “well, wait a minute, hold on. What was the grade you were giving them based on- what?

Are you talking about the people they’re serving, which are the ruling elite. The ruling elite seem to like what’s happening quite a bit.” When you think of stratification and stuff like that…

I guess my point is, is that when you look at outcomes and you’re trying to tie them to institutions and you are imposing what you value, your values, to say, “oh, well, this is a failed institution.” I think it’s naive.

I think that there is an element missing as to who is creating the institutions, who is creating the common sense, who is creating the hegemony of thought, and who is building out those quote, unquote “rules” and so forth. And they look to see who’s winning and who’s losing and whose interests are being served. You know what I mean?

Like, to me, it seems like shotgun scatter with the way people see these things. They’re judging it through their own personal lens as to whether or not these institutions have succeeded or not.

I fundamentally find the lack of tying it together with power maddening, honestly.

Erald Kolasi:
00:18:02

Yeah, I mean, you’re absolutely right. You’re pointing to a fundamental issue of how do you want to define success for nations in the first place? Right?

And there’s no magically right answer there. And you could look at different metrics to evaluate sort of national success. Right?

Most economists, like Acemoglu and Robinson, they’re really focused on GDP per capita.

And I’m going to play by their rules as I go back and analyze North and South Korea and show the reason why they turned out the way they did has virtually nothing to do with their different institutions. Not that the institutions don’t matter, but they’re not even like the top two or three factors that matter. So you’re absolutely right.

You can question what makes national success in the first place. For example, Cuba has like 6 or 7% of America’s GDP per capita. But Cuba’s life expectancy is roughly on par with that of the United States.

It’s only like slightly below it, right? I mean, but it’s almost right there.

So the point is, for me, and I think this is kind of a digression, but for me, a lot of biophysical metrics matter a lot more when you’re trying to analyze the state and health of a society. Right? How long are people living? The literacy rate, health outcomes, how many people are living with chronic diseases?

So it’s not just how long are people living, but what is their quality of life while they’re alive? Right? If you live for 80 years, but you live with chronic diseases for that whole 80 years, then you struggled a lot in your life.

So to me, these biophysical indicators are more important than the financial indicators. But I will say, Steve, in my attempt to demolish this theory, I’m going to play by their rules.

So I’m going to focus on GDP per capita and all the financial indicators they care about. I’m going to leave aside that other stuff for the most part.

So I want to revisit North and South Korea and see through a concrete example, and then I’ll delve into some other history why the institutional theory of economics is just fundamentally wrong.

So if you look at North and South Korea and their historical development starting from around the middle of the 20th century, they were roughly on par just before the Korean War and then after the Korean war, from the 1950s to the mid-1970s, North Korea was actually ahead of South Korea economically. That’s right. By the mid-1970s, North Korea had a higher GDP per capita than South Korea.

It’s not until the late 1970s and 1980s that South Korea starts pulling ahead. From the mid-1950s to the mid-1980s, North Korea’s average GDP, real GDP growth is about 6%. Now, South Korea’s over those 30 years is about 7, 8%.

So it’s higher, so it’s better. But clearly North Korea was doing pretty well. I mean, an average 6% growth rate for 30 years, that’s not bad. Again, it’s not phenomenal.

You can find better examples, but it’s pretty good.

So clearly, when North Korea was a tyrannical dictatorship, as it was throughout the Cold War, it had a fairly easy time generating high growth rates.

And so the question is, what happens in the ’80s and especially in the ’90s, where North Korea’s economy just completely collapses, and they have a famine and roughly a million people die. Why do things go so badly? Is it because of institutional changes? Did the institutions suddenly get worse? Well, no.

I mean, North Korea in the ’90s still had the same corrupt dictators that it had in the ’50s, right? The fundamental system didn’t really change. Right? The political system was still tyrannical. The economy was still controlled by the government.

Everything was nationalized. Nothing fundamentally changed there. So how come North Korea was doing so well from the ’50s to the ’80s, and then it just crashes in the ’90s?

And the reason, of course, if you know your history, is because the Soviet Union collapsed and North Korea was heavily dependent on Soviet economic aid. Heavily dependent. The majority of its foreign trade volume was actually with the Soviet Union. It got a lot of its oil from the Soviet Union.

So in the ’80s, when Gorbachev comes to power in the late ’80s, he basically pulls back a lot of foreign aid. So as he pulls back the Soviet imperial project, he pulls back on the Brezhnev doctrine.

He says he’s not going to intervene militarily in Eastern Europe. He starts pulling back a lot of financial aid, including from North Korea.

So North Korea used to receive a lot of heavily subsidized oil from the Soviet Union, and obviously that was a huge boon to its economy. Right? That’s one of the fundamental things that powered its economic growth, was getting cheap energy from the Soviet Union.

So in the ’90s, the Soviet Union collapses, all of that cheap energy goes away. And oil and fossil fuels, they’re critical inputs in the Haber Bosch process, right, which converts nitrogen to ammonia.

And ammonia is a fertilizer for crops. So that’s how we get the vast majority of the fertilizer in the world, which is so critical for agricultural productivity.

You get it by converting nitrogen and hydrogen and combining them into ammonia. And fossil fuels are a critical input into that process because you need to generate high temperature. So you need to burn a lot of fossil fuels.

You need to get the hydrogen in the first place. So methane and other hydrocarbons are a big source of that hydrogen. So think about it.

You know, North Korea’s oil imports dry up because the Soviet Union collapses. So their fertilizer production collapses. Industrial production also collapses. But the fertilizer collapse is what’s important here.

The fertilizer production collapses, agricultural yields plummet, and that leads to a famine in the mid-90s. Right? So that is what happened causally. It had nothing to do with the institution.

It’s North Korea had an exogenous shock to its economic system, which caused it to absolutely tumble economically. And then that led to a terrible famine, like I said, in which about a million people died.

And North Korea didn’t have a lot of foreign currency, so it didn’t have dollars just stashed in its pocket. And it could go to Saudi Arabia and say, “give me your oil.”

And so the result was that its oil consumption plummeted when the oil imports plummeted, when the cheap energy ran out, the oil consumption plummeted, fertilizer production plummeted, industrial production plummeted, the economy plummeted. And that is the fundamental reason why North Korea today is poor and South Korea is rich.

Now, institutions are important here in the sense that the North Korean government could be choosing different developmental paths right now if it wanted to open up its economy more and things like that, that probably would generate a little bit more economic growth. There’s no doubt about that. So no one is denying that institutions, in some sense, aren’t important.

But the point is, the fundamental difference between North and South Korea is not because they have different institutions. It’s because they were part of different imperial systems, and those imperial systems guarded them in different ways.

One imperial system collapsed, and so North Korea ended up collapsing. The other imperial system, South Korea and the United States, did not. Right? They were the immediate winners of the Cold War.

And South Korea, as a result, has done very well. So that’s the reason why their strongest case study is wrong.

I want to take a broader historical look, though, and just explain what are some of the other sort of long historical arcs, some other big issues with their theory. So a common line of criticism against them has been that the dichotomy between inclusive and exclusive institutions is too naive and simplistic.

Think about all the thousands and tens of thousands of societies and tribes and tribal confederations and nations and kingdoms and duchies and empires that have existed throughout human history. Right? How can you classify all of that rich variety and all these different developmental trajectories with two categories? It’s kind of silly.

I mean, Steve, it’s as silly as if I said, “take all of the colors that you see in the world and only describe them with two words.” Right? You know, warm and cold. So you can’t use the words red or blue anymore. Or green. I’ve taken those out.

You can only say, if I see red, and you ask me what color that is. Well, it’s a warm color. Oh, okay.

You know, England in the 17th century had inclusive institutions, while the Glorious Revolution came in just magically. So it’s this highly naive binary distinction which completely ignores the incredible richness and variety of people’s actual experiences in history.

That’s been a common line of criticism. Another common line of criticism is that inclusive and extractive institutions are often fundamentally entangled together, Steve.

So they bring up Venice in the Middle Ages and the Commenda contracts. Right? So these were contracts where basically two people would establish a joint venture.

One would be the traveling partner, they would go on the ship and go on the voyage. One would be a sedentary partner staying behind in Venice, but they would put the upfront capital for the venture. Right?

And they say this was a major reason for the upward social mobility in Venice sort of in the High Middle Ages. Okay, so that’s fine. But what were the Venetians trading a lot of in the Middle Ages? Well, they were trading slaves.

Venice was one of the absolute central actors of the slave trade in the Mediterranean world during the Middle Ages.

So you can argue, well, the Commenda contract itself, or the Colleganza, as the Venetians called it, that itself was really inclusive, sure, but it depended on a wider system of extraction. So was it really inclusive? What do we mean by inclusive and extractive? The broader criticism here, of course, is colonialism and imperialism.

A lot of people have attacked this book for being apologetics, basically, for colonialism and imperialism, because so much of European economic growth, especially in the second industrial revolution in the late 19th century, was heavily dependent on extracting raw materials and commodities from the colonies. Right? Through imperialism.

Steve Grumbine:
00:27:23

Yes.

Erald Kolasi:
00:27:24

Think about rubber, right? Rubber was a critical early component in the auto industry. Most early tires were made out of rubber. Well, where did the rubber come from?

Well, it came from the Congo and Southeast Asia, but predominantly from the Congo. And the Belgians ruthlessly exploited the Congolese people, led to one of the worst genocides of modern history there actually, millions of people ended up dying. And if your listeners are interested in finding out more about that, you can read the book King Leopold’s Ghost. Be warned, it’s pretty rough.

So the point is, all of these things, you know, rubber and later oil and, you know, nickel and manganese and even copper. So many of these critical inputs for industrial production, some of them came from Europe, at least up until the middle of the 19th century.

But by the late 19th, early 20th century, a lot of this stuff is just coming from the colonies, right, and from the imperial system that the Europeans have set up. Cotton is another great example. Right?

Britain used to import a lot of cotton from the southern United States. That was the slaves picking the cotton, right? Then after the Civil War, transitioned to Egypt and India.

Again, those were part of the British imperial system by the late 19th century. So the point is that if you have a very myopic lens of history, you can say what’s happening over here is an inclusive institutions.

But if that inclusion is based on the suffering of hundreds of millions of people around the world, then are the institutions really inclusive? That’s what it calls into question. It’s like, what do you mean actually by inclusive and extractive?

And so that gets back to the criticism of the first point is how different is this dichotomy, kind of simplistic, naive and silly? And another major mistake that gets to me- I really want to hone in on this because I think it’s really important- so, the importance of exogenous shocks and factors in not just amplifying preexisting institutional differences, but in creating- in creating institutions in the first place. One of the examples they bring up in the book is the Magna Carta.

And they say the barons, the English barons, they stood up to King John and they forced him to sign the Magna Carta in June of 1215, right? And then they talk a little bit about what was in the Magna Carta.

And I was reading that and I was laughing to myself and I was like, do you actually know why the Magna Carta was signed? It was signed because King John had been at war with the French for over a decade. And the war ended disastrously in 1214. Right?

In 1214, his allies, his German and Dutch allies got wiped out at the Battle of Bouvines In July of 1214, the battle that made modern France, as many historians call it. John himself was defeated in the western theater of the war. So it just all collapsed. John limped back to England later in the year.

The barons were on the verge of revolt. Why? Because he had squandered their time and money on a losing effort.

He had been taxing them for the past decade, you know, relief taxes, which were taxes on inheritance. So when somebody inherited property, the king would take a tax out of that. He taxed everybody.

He taxed the Jews, he had a one time tax in 1207, 8% of everybody’s movable goods, right? So crops and livestock and things like that, just 8%. So people were really pissed at John by 1215 because he had been taxing them to near death.

And then he lost the war in the end. So essentially he was in a position of weakness that’s why he was forced to sign the Magna Carta, otherwise they were just gonna dump him, basically.

And the funny thing is, after he signed it, he completely reneged on it and went back on his word. So he signs it in June 1215. Then he goes back, he writes to Pope Innocent III, one of the most powerful secular popes of the Middle Ages.

He writes to Innocent saying, I did it under duress. I didn’t mean to do it. They forced me to do it. Please cancel this. And so the Pope writes back, yep, Magna Carta is cancelled.

After that, the barons revolt. So there’s a full revolution against John and they actually invite the French to come over.

So Philip II’s son, Louis, he comes over and invades England. So French army invades England.

By 1216, they actually take London, they capture London, and it looks like the French are just going to take over England again after the Norman invasion. And then basically, in October 1216, John does the single greatest thing he ever did in his life. He finally dies.

He finally dies and then the barons, they turn against the French. They support his son, Henry III, who goes on to reign for, like, most of the 13th century.

So they support his son, the barons turn against the French, the French are defeated in 1217, and Louis comes back home. That was the immediate aftermath of the Magna Carta. Right? That’s the sort of the historical context behind it.

And the overall point there is that even if you want to say, well, the Magna Carta was partially based on the Charter of Liberties passed by Henry I in the year 1100, well, sure, that’s true, but why did Henry I pass that charter? Oh, it’s because of the Norman invasion and all of the political and economic problems that the invasion caused in the subsequent decades.

So even that, it’s not an example of a preexisting difference being amplified. It’s war and exogenous shocks creating new institutions in the first place. Why?

Because these exogenous shocks, whether you’re talking about pandemics like the Black Death or war or other natural disasters, they shuffle the deck. Right? They change the ruling classes. And as the ruling classes are changed, when new ones come into power, they have different priorities.

They want to pursue different institutions. Right? Remember, institutions are fundamentally a reflection of the ruling classes.

Steve Grumbine:
00:32:49

Yes.

Erald Kolasi:
00:32:50

Those classes that have power will then establish the institutions that they want in society. Right? That is how the Magna Carta should be seen, how the Charter of Liberties should be seen, how anything should be seen.

I’ll give you another example that I like. Public education, right? Why do we have public education? Well, there was a point in human history where we didn’t.

Governments in Europe for most of their history were not involved in funding or organizing education. That was the role of the church. The church, private individuals, patronized education a lot as well. But that’s who did it.

Governments themselves mostly spend money on war. So then why do they do it? There’s the 30 year war in Europe in the 17th century which leaves the German states devastated.

And after that war, a lot of German states start saying to themselves, hey, we kind of need to inculcate certain standards in our population, in our public. We need them to be more loyal to us and things like that. And so these are the first embers of public education, right?

But even then it wasn’t really funded by the state or organized in any coherent way by the state. It was still mostly private, wealthy individuals and the Church. Prussia in the 18th century does put in some compulsory schooling laws.

So you know, kids five to like 13, they have to go to school. But again, it’s not really enforced and it doesn’t, you know, make much of a difference in most people’s lives.

What really changes the game for public education is the Napoleonic Wars. So in 1806, France decides to invade Prussia.

And so Napoleon leads this rapid, you know, almost blitzkrieg like campaign against the Prussian army, defeats them in a few weeks. The military maneuvers start in early October and by late October, the French are marching through Berlin.

In the following year, Napoleon defeats the Russians. And then at the Treaties of Tilsit in 1807, Prussia loses over like half of its territory. And so here is Prussia, just absolutely decimated by 1807.

And the ruling classes in Prussia have lost their credibility, right?

So the conservative Junker classes, the landowning aristocracy, they’ve lost a lot of their credibility because they’ve just suffered this massive national humiliation. And as a result a lot of reformers come along, right?

So there’s a bit of a reshuffling of the class dynamics in Prussia where the reformers like Scharnhorst in the military and like von Humboldt for education start to have a lot more power, right? And so von Humboldt in particular, he implements a lot of major reforms that essentially form the cornerstone of the modern K12 system.

So this is when Prussia decides to adopt not just compulsory education like they’ve done earlier, but they actually decide to enforce that. They actually decide to fund it, you know, to have state funded education.

That’s something vastly different than what was before the State even establishes sort of like national curriculum standards and national professional standards for teachers. Right? So all teachers have the same competencies and capacities. Kids are learning the same things.

The government sort of wrests control from education from the church, right, and from private individuals. And so this is sort of the major birth of the modern public education system.

It happens because Prussia was absolutely humiliated in the Napoleonic wars and decided to implement a lot of major reforms to its society. Later in the 19th century when you have American reformers like Horace Mann going to Prussia in the 1830s, seeing what was happening there, they were very impressed.

They came back, they imported a lot of those ideas, right? And so a lot of what started in Prussia then spread all around the world. And essentially that is why we ended up…

I mean, I’m cutting a lot of the historical details for the United States, obviously, but the point is, that is how we ended up with modern public education. It was in response to a national humiliation from the Napoleonic Wars. Right?

And so the broader point there, Steve, as I’ve been saying, is that these exogenous shocks, they don’t just amplify preexisting differences among institutions, they can also create new institutions in the first place. Right? Including inclusive institutions, the exact same kinds of institutions that Acemoglu and Robinson care about.

And I can’t think of a more inclusive institution than modern public education- universal, compulsory, modern public education that includes millions and millions of children for free. Right?

There are very few things that are more inclusive than that. And the point is that system, there was a point in history when that system just did not exist. And then it existed. Right?

So it was born for the first time. And why was it born? Basically, it was a response to war. And so that war then scrambled the ruling dynamics- the ruling class
dynamics in Prussia- gave more power to the reformers over the conservatives.

And so because they had more power, they were able to implement their vision for public education and for a lot of other areas of Prussian life, which ultimately helped Germany out. But especially public education really was one of the biggest, if not the biggest, reforms that was made.

And that reform then reverberated around the world. Right?

So this is one thing they fundamentally get wrong, right? They never really explain where inclusive institutions come from.

They kind of just assume they’re there sort of in these kind of initial conditions, and then these critical junctures and shocks come along like wars, like natural disasters, and then they amplify these preexisting differences. But the point that I’m making is that no, these shocks can create them in the first place.

Once you’re willing to accept that argument, then you really can see the importance of fundamental background factors like ecological and geographical conditions. Right?

And especially when ecological conditions change, like when a pandemic comes along and fundamentally transforms a society and how society works. Right? Like Covid came along, and then a lot more people started working from home, and that suddenly became acceptable for a long time.

So that’s just a minor example, but you get my point. Right?

Steve Grumbine:
00:38:47

A great example, though.

Erald Kolasi:
00:38:49

Yeah. So that is something that strongly undermines their theory.

It’s just that human society is embedded in a broader natural world and embedded in the broader planetary biosphere. And so it interacts with the planetary biosphere. Human societies, of course, also interact with other human societies.

And those exogenous interactions, either trade or war or other things, can also affect the internal dynamics of society. That, I think, is where they make a huge error.

They’re so focused on the internal institutional dynamics of a society that they ignore the profound exogenous external factors that can affect the internal evolution of those institutional dynamics. Right? Like. And again, I gave a major example earlier when the Soviet Union collapsed and that dragged down North Korea’s economy profoundly.

So let me pause right there and get your take on that, because I know I spoke for a while, so.

Steve Grumbine:
00:39:39

It’s great, though. You’re the star here for this.

But as far as it goes, I mean, a couple things are jumping out to me when you said they just act like, yeah, it was just always there, kind of like these always, never statements. This thing was just there. And then it wasn’t. Hey, this is like going to grad school.

I know this is kind of different, but, like, I remember when I sat down in my first finance class, they tried to explain how money comes to be, and it was just like, wow, they sell bonds. Well, where do they get the thing to do that to begin? You know, and they never had answers for any of these questions, I mean, at all.

And I couldn’t understand why that was. But in reality, a lot of these narratives that we go through do not take a dialectical perspective of understanding how things come to be.

And I think this concept of institutions is really important because a lot of people think we’re just going to vote these institutions in. They don’t realize that…

You know, I think the vast majority of these institutions come as a direct result of some significant shift, not only in ruling class dynamics, because it’s certainly not brought on by the desires of the working class.

It’s brought on by the ruling elite and whoever the ruling classes of that time, which you have been repeatedly bringing to the fore in this conversation. That, to me, I think is really important.

I think it helps level set expectations through normal, acceptable institutional channels for change. Coming to the United States, momentarily, I think we all got shocked when Biden was stymied with the PRO Act because of the parliamentarian and other things like that.

I mean, when the ruling class doesn’t want something to happen, it just doesn’t happen. And no amount of hand wringing by the voters, so to speak, is going to change that.

The voters have to do something different to make those kinds of shocks occur, to create the conditions by which change happens. Anyway, I just thought of that as you were going through it.

It is a marvel how we eliminate or ignore the base conditions that create the environment for these kinds of institutional arrangements.

Intermission:
00:41:55

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Erald Kolasi:
00:42:18

Yeah, yeah, absolutely.

What it highlights is, I think, one of my fundamental critiques against sort of the new institutionalists and a critique that other people have made as well, which is that yes, institutions are important, but they’re not fundamental. At the end of the day, it’s not really the institutions that truly matter. It’s the people in power, right? It’s who holds power.

And those who hold power will try to establish the institutions that are concordant with the power they want to exercise in society. Now, of course, there can be resistance to that as well. So no one has infinite unlimited amounts of power, right?

Not our current president, not any other president, not any future president, not the worst tin pot dictator in the world, right? No one has unlimited power. And I’m glad you mentioned sort of the dialectical dynamics.

Always when the ruling classes in any society try to establish their power, they will encounter various levels of resistance, right? Sometimes, as Marx and Engels say, that resistance can come out in the open, you know, the form of revolution and rebellion and things like that.

Sometimes the resistance can be more hidden or let me just say, you know, more subdued, right. In the form of protests or strikes or other various activities at work that are meant to kind of sabotage capital.

But the point is there is that resistance there. And when you do have these exogenous shocks that impinge on societies, right.

That, you know, influence how those internal Dynamics evolve, then those who are providing resistance to the ruling classes can sort of get a leg up.

Their position can be strengthened, and maybe if it rises to the level of, you know, a revolution or something like that, they can actually take over. Right. Like the many revolutions we’ve had in modern times, a lot of them were caused by exogenous shocks.

For example, there is a paradox in that Lenin and many other socialists were against World War I. And yet World War I is the fundamental reason why the Bolsheviks came to power in Russia.

Yep, because World War I is what led to mass starvation in Russia.

You know, the breakdown of the Russian army, you know, mutinies, and then, of course, a lot of the protests and the strikes and the fighting on the streets. So kind of the broader collapse of social order in Russia happened because of World War I.

And that set the stage then for the Bolsheviks to come to power in 1917, and then they formalized that later in 1918. So that’s just another famous example. But you get the point, right?

Which is that really what matters is who has power and how do they choose to exercise that power. And then the institutions are sort of a downstream effect from these broader class dynamics situated within the context of historical materialism.

Steve Grumbine:
00:45:06

You know, you and I got together as a result of modern monetary theory and the work of this podcast. I appreciate your support all these years, and just the number of times you’ve come on has been amazing.

But if you understand the MMT angle, you understand that it is based strictly in that institutionalist framework, understanding institutions, maximizing institutions, altering institutions through representative democracy in their mind. But I would push back that I don’t believe we have seen evidence of people voting their way to any of these changes.

In fact, as I will bring up until I lose my voice, Gillens and Page have suggested that that is just a laughable idea, that public opinion actually is what changes the nature of legislation and institutions. And as we’ve seen coming out of COVID the shift in. People talked about the great Reset. I think we could just say the great institutionalist reset.

Right. Like the new institutions coming out of the crisis of hegemony that the COVID pandemic brought about.

And you could see in China, China has done laps around the United States over the last, I don’t know, 50 years or so in terms of bringing up quality of life, bringing up the kinds of institutions, if you will, that enable the people of China to lead fuller lives. I mean, they don’t lack for health care, they don’t lack for education.

They don’t lack for a great many things that people in the United States would be just mind blown if they didn’t have to worry about. Can you talk a little bit about China and institutions and how this plays in the, the work that you’re critiquing?

Erald Kolasi:
00:46:52

Yeah, absolutely. I’m so glad you brought this up.

You know, Acemoglu and Robinson, in their book “Why Nations Fail,” they do cover China extensively because the book came out in 2012 and by then China was already a well known growth story, right? A major growth engine for the world economy. So they kind of have to say something about it.

And so they cover recent Chinese history over the past 70 odd years or so. They talk about Mao, and in their view, Mao was just an abject failure and didn’t do anything right.

And then they talk about the institutional reforms that Deng Xiaoping made and how those institutional reforms, you know, like opening up special economic zones, how those institutional reforms then set China on a trajectory of world beating growth rates for the rest of the 20th century and the early 21st century.

Then basically they say that, look, China has had amazing growth, but it’s still fundamentally built on extractive institutions and these kinds of extractive societies, they can have growth for a while, but they can’t really innovate. You know, China’s mostly a copycat.

It just takes everything from everybody else and eventually the growth rates are going to collapse and China’s going to stagnate. So that’s, if you will, loose predictions, I’ll put it that way. Right.

Because they also hedge their bets that they say, well, we don’t really know what could happen. But based on their theory and what they write in that chapter, that’s kind of what they’re thinking about China, right?

That it’s fundamentally an extractive dictatorial society that’s going to run out of steam. That was written 13 years ago. That hasn’t happened obviously to this point.

Right now, China’s standing and position of strength relative to the west is higher than at any point in history. So, so far what they were sort of loosely predicting hasn’t happened.

But I do want to talk about China more broadly because I think there’s a lot of cognitive dissonance among Western elites, including people like economists like Acemoglu and Robinson, when they talk about China. So on the one hand, people want to credit people in the Western world, especially want to credit China’s amazing success to free market capitalism.

Look, they allowed for a private industry to come in and foreign investment and you know, the government doesn’t control everything anymore, like under Mao. And that’s why they succeeded. Right. And in part, this message is meant for domestic audiences.

It’s a way of selling neoliberal free market capitalism to domestic audiences. It’s basically saying, look, the way China did it is by becoming more like us. That’s how they did it, guys. Like, they became more like us.

So therefore, we don’t need to really change anything in our system, because this is how everybody does it. Right. Anybody who has economic success, this is the path. Right.

It’s neoliberal capitalism, privatization, austerity, free trade, you know, the whole works.

Steve Grumbine:
00:49:36

Right.

Erald Kolasi:
00:49:37

So part of that message is meant for domestic audiences. On the other hand, Steve, you may have noticed that Western elites increasingly are talking about China in antagonistic terms. Right?

And there’s, you know, Trump, the trade war in his first presidency and launched kind of another trade war, which is sort of going nowhere in his second term as well. Right.

So on the one hand, Western elites are also highly antagonistic towards China, and they want to make it into essentially the big bad wolf in a new cold war. And so there’s this kind of tension, this dissonance there.

China, on the one hand, is a tyrannical dictatorship where people don’t have free speech and they can’t do anything. But on the other hand, they’re like us, guys. It’s free market capitalism, and that’s why they’re succeeding.

So there is that fundamental tension in the way that people in the Western world talk about China, that where do you put the emphasis on how much are they like us versus how much are they really different? And I’m going to get to that part.

But first, I want to kind of go over the way Acemoglu and Robinson covered recent Chinese history, starting with Mao.

And when we talk about Mao, especially when right wingers talk about Mao, the two phrases out of their mouth are always the Great Leap Forward and the Cultural Revolution, as if that’s all that happened Under Mao. Under 27 years of Mao’s rule, the only things that happened were the Great Leap Forward on the Cultural Revolution.

Now, those two things I want to emphasize were horrible, terrible mistakes. The Great Leap Forward was Mao’s attempt to rapidly industrialize China. It ended in disaster. Millions of people died from famine. Yes.

The Chinese government says part of it was made worse by natural disasters like droughts and severe floods in certain part of the country. And that is to some extent true. But most historians acknowledge that it was a man made disaster. Right.

So the Great Leap Forward was a man made catastrophe. And the bulk of the blame lands in Mao’s lap.

Now when Acemoglu and Robinson talk about Mao, they almost portray him as like an absolute tyrant with absolute power. That’s kind of literally what they say, like all power was concentrated in Mao and you know, he led the country to disaster.

What they don’t understand is that that claim is just fundamentally false. There were various factions within the Communist Party that wanted different things, right?

So there was, you know, the old guard, you know, leftist Communists like Mao. There were more reformers like Deng Xiaoping and Liu Xiaoqi.

And when the disaster struck in the Great Leap Forward, the reformers had the upper hand, Right. Mao actually lost the title of chairman of the PRC in 1959. The day to day economic administration of the country shifted to the reformers, right?

So Mao for about seven years was sort of taken away from China, from the economic management of China, right? So he wasn’t making any more decisions about what and how much to collectivize and things like that. Right.

It was the reformers that had the upper hand during that time. And so this reflects various power struggles happening within the Communist Party, which Acemoglu and Robinson don’t say anything about.

They kind of just like brush that aside as if Mao was again, was an absolute tyrant with total power, which is just not the case.

And then Mao, of course, in the late 1960s, then launches the Cultural Revolution to claw back some of the power that he’s lost in the previous few years.

And he does that, you know, he imprisons Liu Xiaoqi and some others, but at the same time, he also doesn’t go back to what he did under the Great Leap Forward. He himself learned a lot of his mistakes.

And there are actually many reforms in the Chinese economy that happened in the 1970s, even before Deng gets into power.

So the point there is that they miss these sort of internal political dynamics within the Communist Party and how the Communist Party had a lot of internal discussions and disagreements about what is the best path forward. Right. It wasn’t just a monolithic vision from Mao that somehow predominated. Different people held power at different times throughout Mao’s rule.

But the other thing I want to emphasize is that so much of Denk’s success later on in the 1980s fundamentally depended on what Mao had done, right? So in the 27 years that Mao was in charge, China’s life expectancy nearly doubled. China’s population nearly doubled.

Chinese steel production, I think increased sixfold, right. From the early 1950s to the late 1970s, China became an industrial powerhouse for the first time in its history under Mao.

As the historian Maurice Meissner emphasizes, when Mao came to power, China’s industrial base was the equivalent of Belgium’s. And then by the late 1970s, China was making jet fighters and tractors and, you know, marine missiles and all these kinds of things. Right.

So it’s a fundamental transformation that happened under Mao. A lot of people in the Western world aren’t told these things because, again, it’s everything is Mao bad. Right.

And it’s amazing how you go to Beijing and his picture is right up there in the Forbidden City. The Chinese people must be idiots to think that this guy who only did bad things is basically their George Washington. Right.

And so, you know, what are some other amazing things that Mao did? Well, in the 1950s, he launched this massive vaccination campaign against many diseases, including smallpox.

By 1960, China was probably the first or one of the first countries in the world to have practically eradicated smallpox.

Steve Grumbine:
00:54:49

Amazing.

Erald Kolasi:
00:54:50

And if you don’t know why that’s a big deal, consider that in the 20th century alone, smallpox is estimated to have killed up to 500 million people. Just in the 20th century alone, that’s roughly the equivalent of all the human beings that have died in all the wars that humanity has ever fought.

Right.

Steve Grumbine:
00:55:07

Amazing.

Erald Kolasi:
00:55:08

That’s what smallpox killed in the 20th century alone. And Mao’s push for a mass vaccination campaign against smallpox is the fundamental reason why. Why it was eliminated in China.

And think about the untold tens of millions of Chinese lives that saved.

And the reason why that’s important, too, is because the who, the World Health Organization, even though it couldn’t operate in China at the time, it was sort of observing from a distance what was happening. It was observing from a distance what was happening. It noticed this success, at least this claimed success.

It couldn’t verify it live, but it assumed that a mass vaccination campaign would work. And the major evidence for that was sort of what happened in China.

And as a result of that, the WHO made a huge international push, Steve, in order to eradicate smallpox worldwide. And so that’s when that happened in the 1960s and early 1970s.

And then by the late 1970s, they formally declared that smallpox had been eradicated from the world. And that is probably the single greatest public health victory in human history. And Mao was at the center of that. Right.

That’s something that most people in the Western world, I bet you do not know about Mao. So. So, you know, once you take Also, literacy rates and education rates skyrocket under Mao.

Mao made education a really big deal, and that was important, both towards improving health, towards training future generations of industrial workers. Because if you can’t read and write, you can’t operate like basic machinery, things like that. You’re not going to be useful as a worker. Right?

So all of these fundamental things, the raising of educational standards, improved health outcomes, greater industrial production organization, these things started under Mao, Right? And also normalizing relations with the United states in the 1970s.

That’s something that also profoundly helped Deng in the 1980s because it led to a flood of foreign capital, the foreign investment coming into China.

Chinese exports to the United States later skyrocket in the late 70s and 1980s, especially after 1980, when China gets the Most Favored nation status, so it faces a lower tariff regime than a bunch of other countries. So Chinese exports start rushing to the United States, foreign capital comes in. That also helps enormously with China’s economic growth rates.

But again, a lot of that early legwork was done by Mao. Mao was the one who agreed to normalize relations with the United States. And, you know, Nixon obviously, you know, deserves credit here on our side.

Nixon and Kissinger, even though I’m not a fan of Kissinger in general, that was obviously a huge move in the Cold War, right? It was one of the central moves of the Cold War. And an important reason why we ultimately won it is normalizing relations with China.

So the point is that so much of Deng’s later success depended on what Mao had done. And from the 50s, a lot of people think that China’s economic growth somehow started under Deng. Nothing could be further from the truth.

China was already growing fairly rapidly under Mao. From the 50s to the 70s, average real GDP per capita growth in China was about 4% under Mao.

Again, it would be faster under Deng in the 80s and the 90s. So that’s absolutely true. It would be faster.

And there’s no doubt that a lot of the institutional changes that Deng made helped produce some of those faster growth rates. But the point is, the Chinese economy was already growing under Mao. It grew enormously over the 27 years that Mao was in power.

It made a lot of fundamental changes and transformations which set the stage for the future success that China has now had. Right? And the other important thing about China is that it’s really sort of a dagger in the heart of the institutional theory.

It’s the major counterexample that everyone points to, because what people like Acemoglu and Robinson want to say is that economic growth is all about having a good liberal democracy in effect. Right? Privatized austerity, neoliberalism, that whole vision of the world, that’s what it comes down to.

And China, of course, provides an alternative developmental path. It’s like you don’t need all of these institutions and all of these structures. You do need some level of competent government, sure.

But you can get massive economic growth if that’s what your goal is. And that’s a separate question of whether that should be your goal. Right.

There’s a broader issue, but if that’s the rules you’re playing by, like you’re trying to maximize economic growth, it’s not clear that having liberal democracy with again, allegedly competitive multi party elections and allegedly independent central banks, allegedly independent judiciaries and all of that, it’s not clear that that necessarily is the best model. You know, one baseline distinction between capitalism and socialism is that capitalism is an economy dominated by private property, right?

And socialism is an economy dominated by public property. And if you look at China, it’s an economy that’s dominated by public property, right?

So at Last as of 2020, the majority of the Fortune 500 companies were state owned.

If you look at companies where the state has any kind of stake, even if it’s not necessarily a majority stake, you’ll find that those companies represent something like 70, 80% of total assets and capital in the Chinese economy.

China operates under a Leninist principle, almost under the new economic policy, where the state has seized control over the commanding heights of the economy. So think about critical industries like energy, finance.

So the top four biggest banks by assets in the world are all Chinese, and they’re all owned by the Chinese government. And the healthcare, you know, defense, right? All of these major dominant sectors, the Chinese government has enormous ownership, right?

Owns so many of the dominant companies that produce China’s things. I mean, can you imagine the American government having the courage to nationalize Lockheed Martin and Boeing? I wish they would, Steven.

If I were in power, that’s one of the first things I would do. But that’s not happening here. Right here we let our current capitalists be private and then we let them overcharge us to no end.

So the Pentagon’s budget keeps bloating just so we can pay Lockheed and Northrop Grumman some more money. So it’s a very different vision, right? The people who say China’s capitalist and things like that depends on what you mean by capitalism. Right.

And Steve, you know, we can play games with definitions all Day long. Right. But if you’re just looking at standard baseline definitions, the Chinese economy is more socialist than capitalist. I would say yes.

That doesn’t mean that it doesn’t have strong capitalist elements. Of course it does. China also has big tech. China also has Alibaba and Baidu and Tencent and all of these major big tech companies.

Yes, sure, they’re private. But the point is, structurally speaking, the Chinese economy is dominated by the decisions that the state makes.

Steve Grumbine:
01:01:58

Absolutely. Can I just jump in momentarily because this is really, really important. We just did a book club here recently on State and Revolution.

And for folks that can’t allow their precious eyes to glance at prior revolutionary thinkers that maybe don’t line up with your Bill Clintons and Obamas to according.

Okay, but for those that have the intellectual integrity to read theory and go back and look at this stuff, State and Revolution talked about the quote unquote withering away of the state, the eventual withering away of the state, the withering away of a lot of these institutions, withering away of class distinctions and so forth. But it doesn’t start there. And they go to great pains explaining that.

And when I think about where China is, it is obviously not the automated luxury gay space, you know, communism or whatever. Okay, it’s not that. But what it is, is on that trajectory of any kind of capitalist element is merely allowed to exist.

It’s allowed to exist and could easily be unallowed to exist because the state functions as an arm to support the state, to make the body politics survive. And they allow certain people to be wealthy as long as it serves the interests of the state.

But they are not afraid to make something illegal or to make a law that really stops some negative externality dead in its tracks. Like we act like, well, free market. We’ve got to allow everything just to play out the way ever it plays out. And that’s winners and losers.

That’s the nature, nature of the markets, baby. And we love it. You know, And I say this because I have grown to despise. I don’t know if that’s the right way.

Yeah, no, it is absolutely the right word. I’m going to despise the Biden bot that ignored his baiting during the State of the Union where he called China our number one enemy.

And he talked extensively about these terms like in bad guy, good guy, axis of evil. You can almost hear Bush saying evildoers.

And it made me so enraged to think about the fact that they have spent all their time allowing capitalists to get rich and not take care of infrastructure, not take care of making sure we have the best and brightest and most educated population. And instead China has said, you know what, hold my beer, we’re going to take care of this. And they have done that.

And instead of going around the world bombing people, I’m not telling you that they’re wearing halos, but I’m telling you they’re not wearing forked tongues and hooves either. I mean these guys are doing what they believe is in the state of China’s best interest.

So when they talk about socialism, it’s with Chinese characteristics is all these components where they allow these things to happen, but they could shut them off immediately. Can you imagine shutting off private wealth accumulation in the United States?

Can you even imagine the institutions that we’ve created in this country, allowing the people to thrive without having precarity on their backs, when in fact they are so ideologically locked into the idea that they must have workers in precarity for their version of capitalism to survive.

And as an anti capitalist and an MMTer and a guy who fancies himself historically and you know, theoretically interested, curious, very much traveling down that path.

It’s no wonder we are in a country that is so bastardized and so fundamentally dog eat dog, no haven for the raven, just why has it got to be this way kind of thing, right? And reality is it doesn’t have to be this way.

That is what fundamentally happened during the Bolshevik revolution when they showed everyone there’s another possibility. And the world said, oh my God, oh my God, what do we have to do? They did a couple minor reforms.

You know, FDR comes in, they’re trying to save capitalism by oh yeah, we’re gonna soften the edge. We gotta chamfer these edges here a little bit. We’re gonna rounding bit error here.

Whatever they did not in any way shape or form put the people first. It’s like food stamps. You know, everybody thinks food stamps are about feeding people. It’s about ensuring the industry doesn’t tank.

These are things that are automatic stabilizers for industry. The secondary purpose of them is to make sure people have food.

The primary purpose is to make sure, regardless of the economy, that there’s industries, those staples for national defense, whatever, they make sure that they don’t drown by ensuring that there is a cash flow to keep them going. And because of institutions, we’ve gotten to the point where we’re penalizing the poor and pointing at them. How dare you get food stamps?

It’s like, you jerk, you Ideological fool. China doesn’t suffer from that. China doesn’t have any of those sorts of things.

Everybody I talk to that’s in China, I’m sure everybody has a complaint about everything. You could have the best wife in the world, you’d still complain about them.

But when you look at the difference between the United States and China, people are thriving. They’re educated, they don’t have to wonder if their cancer is going to bankrupt them.

They don’t have to wonder about housing, they don’t have to wonder about anything. Education’s free, you name it. And I just find that the basics, the basics of life are not commodified. They’re free of charge.

They are in fact free from the profit motive. They are free from the capitalist impulses and the state ensures the outcomes.

And I think there’s proof positive that the institution of free market capitalism is a fricking lie. Anyway, that’s, that’s my take.

Erald Kolasi:
01:07:58

There’s a lot of great thoughts in there, Steve, and I just wanted to follow up on some of what you said. The first thing I want to say is that China does of course have, you know, its own problems, many problems. The cost of living is outrageous.

The welfare state isn’t very strong. For example, China doesn’t have a national insurance system for a retirement pension plan. It’s the different provinces that administer that.

So it doesn’t have something like our Social Security. And as a result, Chinese people save a lot of money. So the savings rate in China is way higher.

That’s why they launch a lot of debt fueled investment. That’s why they rely so much on debt for growth, is because they don’t have as much internal domestic consumer spending as they want.

They have ecological problems and things like that. So I just want to be clear as we’re having this discussion that China has plenty of problems too.

There is no society on earth that doesn’t have a lot of problems, especially right now where we are in late stage capitalism. But having said that, a lot of what you said is absolutely true as well.

Steve Grumbine:
01:08:50

Right.

Erald Kolasi:
01:08:51

So China right now has a higher life expectancy than the United States for the first time in history. That’s something that the Soviet Union never achieved over us.

Steve, a typical baby in America could always be expected to live longer than a typical Soviet baby. But now a typical baby in China can be expected to live longer than a typical baby born in the United States.

That’s a fundamental difference and a huge quality of life improvement over in China relative to here. Right. And there’s just so many other ways. I think, like, yes, inequality in China is pretty bad.

The Gini Index has been rising, especially for income, but it’s not as bad as in the United States. So there’s a lot of, like, indicators like that where China, I think, is doing very well.

Again, it speaks, I think, fundamentally to their developmental path. And I wanted to say something about the power of capital in China.

So you were talking about how in America we can’t impinge on private wealth accumulation. That is one thing that the Chinese government does a lot, as you were pointing out. So crypto.

Crypto is big in the United States right now, and it used to be big in China, but then the Chinese government banned bitcoin mining completely. That’s where a lot of the bitcoin miners transferred from China to the United States because the regulatory environment was lax.

In China right now, crypto is basically dead for profit. Private education is another area where the Chinese government just basically banned it.

Like, they’ve literally just banned for profit, private education. Again, hard to see something like that happening here in the United States. Right?

But it goes to the point that you’re making, which is that, yes, there are a lot of wealthy, corrupt capitalists in China, but a lot of them are also under the close leash of the state. Right?

And if they do something stupid, you can’t have like an Elon Musk figure in China, because if somebody comes out like that thinking, I’m just going to dominate over society and do what I want, you get your ear pulled by the Communist Party and then you’re told what to actually do, right. Before it goes to your head. So a figure like Elon Musk or Jeff Bezos, somebody like that can never arise in China to dominate society.

You can have the Jack Mas that are really wealthy. That’s fine. You can have billionaires. China has plenty of billionaires.

But they don’t have the same kind of institutional power in society that our billionaires have over here, because our billionaires have basically been given free rein to just do what they want. In China, they’re much more closely controlled by the state, both what they do and what they say.

So those are just some examples, I think, to reinforce your point and to reinforce the broader argument that we’re not destined to stick to neoliberal capitalism. We don’t have to do this. That is the choice that our elites have made so far over the past few decades anyway.

But this doesn’t have to be the choice that we make going forward. Right There is. And There are alternative visions and futures available to us, but we need the power of imagination to think of them.

And then we need the political will and more importantly, the organization to actually get it done. And then in the future, if there’s an exogenous shock that comes along that can push the system along, that could also help get things done.

But the point is, we are not destined to stay on the current path we’re at, right? Never eternalize the present. History is dynamic. Things can change.

And there are countries out there, like China, that have shown that alternative developmental paths and trajectories are possible if we’re willing to dare to seize the moment.

Steve Grumbine:
01:12:08

I know we’re coming up to a close here, but I wanted to bring one thing up that we had kind of talked about offline that I think is really important. I was bringing up the arrangements that happened in Zimbabwe, and you said, you know, I think a big better depiction of this could be in Venezuela.

And with Venezuela being right in the crosshairs of Trump’s foreign policy bullshit that he’s doing right now, I was wondering if maybe you would talk about the Venezuela situation a little bit from this perspective.

Erald Kolasi:
01:12:42

Yeah, absolutely. Again, what the institutionalists would say is that Venezuela is a terrible socialist country. And, you know, that’s why the economy has tanked.

That’s why millions of Venezuelans have fled. It’s all because Maduro’s corrupt or Chavez was corrupt, and socialism is bad. And, you know, they’re subsidizing everything.

Everything’s free, et cetera, et cetera. So that line of argument. So here’s what actually happened. After Chavez died, Maduro comes to power, and then things are okay for a little bit.

But then around 2014, global oil prices crash, and that’s terrible for Venezuela because a huge chunk of the government’s budget comes from oil exports, Right? So most of Venezuela’s foreign trade is from oil exports.

Its economy is fundamentally dependent on oil exports because that’s how it gets dollars into the economy. And Venezuela, like many other South American countries, has what I would call de facto dollarization in many corners of its economy.

Meaning dollars are widely used for normal economic transactions. Right? Like if you wanted to stay at a hotel somewhere or something like that, dollars are accepted.

That’s true throughout much of South America and Latin America. And again, that’s a consequence of American imperialism over the past century.

So the point is, Venezuela is very dependent on oil exports for bringing dollars into the economy and for stabilizing the exchange rate between its local currency and the dollar. So oil prices crashed in 2014. Why did that happen? Part of it was the shale revolution in the United States.

So the United States started producing a lot more oil and natural gas. So that led to a supply glut in the global economy.

And that was matched with a decline in demand, especially from China, because Xi Jinping came to power in 2012, he wanted to reorganize the Chinese economy. Again. He was more of a leftist ideologically closer to Mao than to Deng. So he thought China was growing too fast.

It was leading to a lot of imbalances in the economy. And that’s when Chinese growth rates start coming down from like 12, 13% to more like 6, 7, 8% under Xi. Right.

So that’s a massive change that he really gets going in just a couple of years. There’s declining demand for oil in China. There’s a supply glut from the shale revolution in the United States. Oil prices crash in 2014.

Venezuela is highly dependent on oil exports. So suddenly all the dollars dry up, right? Because its oil exports crumble. And so it’s getting far, far fewer and far fewer dollars.

And that leads to inflation, right? Because the dollar, it’s a dual currency regime, in effect.

So if one currency becomes very scarce, what tends to happen in those situations is people start using more and more of the other currency of the remaining currency to get the scarce currency. And so it leads to a lot of inflation, right? And it leads to a recession.

And then what makes the situation worse is Trump 1.0 comes to power in 2017 and he imposes brutal sanctions on the Venezuelan economy. And some economists like Jeffrey Sachs have estimated they’ve led to like 40,000 deaths. And that was a while ago, right?

This estimate was a while ago. Who knows? Who knows now? So they impose this brutal sanctions regime.

It becomes much harder for Venezuela to conduct trade with other countries as a result of this regime. It becomes even difficult to import medicine. Right?

Something so basic because again, a lot of companies don’t want to export to Venezuela because they’re afraid of running afoul of US sanctions, even though the sanctions are not formally targeted at Venezuela as a country, it’s more like the regime.

Nevertheless, it has these kind of knock on effects around the world where a lot of Western companies just don’t want to do business with Venezuela anymore. So Venezuela’s international trade dries up. It’s harder for it to export its oil. The sanctions hurt with that.

So oil production and oil exports plunge even more. So the economy enters a huge depression. That’s when millions of people flee again because of a situation that was made worse by American policy.

And where do a lot of those millions of people end up Fleeing? Right here to the United States. This is a common theme with imperialism. Right.

The right simultaneously loves imperialism but hates immigration. However, imperialism often leads to unwanted immigration.

When we overthrow the governments of other countries, we destabilize those countries, People end up fleeing. This is what happened to Guatemala as well in the 1950s. We overthrew its government. There was a massive three decade civil war that followed.

Hundreds of thousands of Guatemalans ended up fleeing to the United States. Time and time again in Latin America, the same thing happens.

We destabilize the country, the economy collapses, people flee to the United States. Anyway, so the point is, that’s what happened with Venezuela. Again, it’s not fundamentally social. Is that instant institutions bad?

There were a lot of exogenous shocks which crippled the Venezuelan economy. So that’s again, falling oil prices. That was the first shock Venezuela could have weathered that really.

The bigger shock was the huge sanctions that came in in the first Trump administration. And then now, of course, Steve, as you know, there is a quote, unquote pressure campaign to try and topple Maduro.

We don’t know where that’s going to go, if it’s going to lead to a full blown war, if there’s going to be sort of a coup or something else, or who knows.

But the point is there is a massive American effort now to overthrow the Venezuelan government and that’s going to produce a lot of chaos and instability as it always has.

And so fundamentally, once you understand what happened in Venezuela over the past few decades, you realize that again, the central part of the story isn’t the institutions, isn’t socialism, capitalism. It’s all of the exogenous shocks and factors that are impacting the internal dynamics of the Venezuelan economy and the political system.

Steve Grumbine:
01:18:12

And who’s in power via external source.

I mean, one of the things that I guess as we close out that I think is really important, that I’ve gotten from this is a lot of the things that we hold on to as just people, our false consciousness. I don’t know if I’m saying this correctly, but I’m just going to say it plainly.

I mean, the things that we think we know and the reasons why things are the way they are, the way we, we just envision them, are not really rooted in truth.

I mean, a lot of the stuff that we think we know, we find out that these things are institutions brought on by the power elite, they are thoughts, they are concepts, they’re ideas that cloud the material reality that underlies them. And we just assume that TINA narrative, “there is no alternative,” because it’s terrifying, it’s bigger than us, it’s beyond what most people can wrap their brains around. And ultimately the people in power make decisions.

They begin their PR campaigns, they spread propaganda, they change narratives using that media arm that, what I think five billionaires own all the media. And so in terms of deeply entrenching institutions or even shifting, they’ve got all the tools and power to do it.

So if we flip this on its head and it was the working class that had control of those things, that it had control of the state, that it had control over the institutions and stuff, it would look very, very differently. We can’t say for sure, you know, what it would be because you saw the difference that happened in Russia.

We had a very different outcome than we did say in Italy. Gramsci was very clear on that. Your final thoughts on this as we go out? I just.

I wanted to throw some of that out there, get the juices flowing for further work.

Erald Kolasi:
01:20:10

Thank you so much. And I think this is such an important discussion. I think my final thoughts would be, you know, as a.

As a materialist myself, always remember that history is. Is dynamic and full of opportunities, and it doesn’t just end right now.

So there’s a vast horizons of possibilities that are open to us in the future. And I think what people need to do is to think, to organize, see where we can apply pressure points in the system.

And eventually down the road, a lot of big changes are going to come. They may not come as fast as we want them to come. That’s often what’s frustrating about history, right?

But the thing is, whenever you have a critical juncture, as the institutionalists call it, or a shock or a revolution, or whatever you want to call it, revolutions can often undo in a few hours what has been building up for a thousand years. So never forget that. The power of a radical break with the past and how we can alter human history.

And that’s some of the examples that we’ve been covering in this conversation, Steve. And I hope people take some inspiration from that going forward.

Steve Grumbine:
01:21:12

Fantastic. All right, folks, my guest Erald Kolasi is an amazing mind. He’s an author and he runs a substack that I highly recommend.

It’s under his very name, Erald E R A L D Kolasi K O L A S I and his book. Real quick, plug your book one more time for everybody because I want them to get this book.

Erald Kolasi:
01:21:34

Thanks. It’s called the Physics of Capitalism. Came out earlier in 2025.

It’s about complex relationship between human societies and the natural world and how they affect each other. So yeah, thanks so much.

Steve Grumbine:
01:21:47

Absolutely. All right folks, my name is Steve Grumbine. I am the host of Macro and Cheese. This podcast is a part of the non profit Real Progressives.

Real progressives is a 501c3 not for profit. All of our work is funded by you. Donations. And those donations are at least as long as this institution exists, tax deductible.

So please consider becoming a monthly donor to our work. You can go to our website, realprogressives.org, go to the donate section.

All of the platforms, from the recording platforms, to replacement parts for the equipment, to all the different things that we do with webinars, you name it, all of that costs money. We desperately need your support. You can also go to patreon.com real progressives. And of course we have our own substack Real Progressives.

And we would love for you to become a monthly donor there as well. With that, on behalf of my guest, Erald Kolasi, myself, Steve Grumbine, we are out of here.

End Credits:
01:22:58

Production, transcripts, graphics, sound engineering, extras, and show notes for Macro N Cheese are done by our volunteer team at Real Progressives, serving in solidarity with the working class since 2015. To become a donor please go to patreon.com/realprogressives, realprogressives.substack.com, or realprogressives.org.