Daron Acemoglu, Elizabeth and James Killian Professor of Economics, MIT Sloan School of Management
From Project Syndicate
In the Middle Ages, Italian city-states led the European “commercial revolution” with innovations in finance, trade, and technology. Then something strange happened. In 1264, to take one example, the people of Ferrara decreed that, “The magnificent and illustrious Lord Obizzo … is to be Governor and Ruler and General and permanent Lord of the City.” Suddenly, a democratic republic had voted itself out of existence.
In fact, this was not an uncommon occurrence in Northern Italy at the time. As Niccolo Machiavelli explains in The Prince, the people, seeing that they cannot resist the nobility, give their support to one man, in order to be defended by his authority. The lesson is that people will abandon democracy if they are worried that an elite has captured its institutions.
Medieval Italy’s democratic institutions succumbed to what we might now call populism: an anti-elitist, anti-pluralistic, and exclusionary strategy for building a coalition of the discontented. The method is exclusionary because it relies on a specific definition of “the people,” whose interests must be defended against not just elites, but all others. Hence, in the United Kingdom, the Brexit leader Nigel Farage promised that a vote for “Leave” in 2016 would be a victory for the “real people.” As Donald Trump told a campaign rally the same year, “the other people don’t mean anything.” Likewise, former Colombian President Álvaro Uribe often speaks of the “gente de bien” (the “good people”).
MIT Sloan Professor Simon Johnson
From Project Syndicate
Populism is an approach to government that relies on lavish promises that ultimately cannot be met. The most prominent historical cases since 1945 were, for a long while, mostly found in Latin America. There are always apologists who claim that a new source of economic miracle has been discovered. But the ending is always the same: some form of crisis and disaster. Populism today is again in the ascendancy, but now one of the most virulent forms is in the United States – and with the credibility of the central bank very much on the line.
Argentina under Juan Perón (1946-1955 and 1973-1974) and his successors is often held out as the canonical example of populist misrule. Each iteration of populism has its special features, but the general pattern is this: unsustainable wage increases, an overvalued exchange rate, and massive foreign borrowing (enabled by local recklessness and foreign short-sightedness). Critics are persecuted, experts disparaged, and ridicule piled onto anyone with any kind of reasonable concern. Central banks and other independent governmental bodies, such as courts, are always subverted through personnel changes and other pressures.
Then the reckoning comes, with some combination of inflation, significant exchange-rate devaluation, and a deep recession (or worse). All too often, the cycle then starts again with another round of promises that cannot possibly be met. The central bank’s credibility, once dismantled, does not easily return.