Planet Money - Summer School 1: A government's role in the economy is to make us all richer

Episode Date: July 9, 2025

Government. The Big G. We like to imagine the free market and the invisible hand as being independent from political influence. But Nobel laureate, Simon Johnson, says that influence has been there since the birth of economics. Call it political economy. Call it government and business. Call it our big topic each Wednesday through Labor Day. We're kicking off another semester of Planet Money Summer School asking the biggest question: Why are some nations rich and others poor? With stories from India, New York City and Peru, we look at the ways in which government bureaucracy can help make or break an economy. Tickets for Planet Money Live at the Bell House available here. Planet Money+ supporters get a 10 percent discount off their tickets. Go to plus.npr.org to sign up, if you haven't already, and listen to the July 8th bonus episode to get the discount code.Always free at these links: Apple Podcasts, Spotify, the NPR app or anywhere you get podcasts.Find more Planet Money: Facebook / Instagram / TikTok / Our weekly Newsletter.Planet Money+ supporters get early access to new episodes of Summer School this season! You also get sponsor-free listening, regular bonus episodes, and you'll help support the work of Planet Money. Sign up for Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney. Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

A quick reminder, Planet Money Plus subscribers get access to summer school episodes one week early. Sign up at plus.npr.org slash Planet Money. This is Planet Money from NPR. That ring can only bring one thing. It's the Planet Money Summer School, your easy-listening, hard-thinking audio economics degree and the only education you can get these days without putting on pants or taking on debt.

I'm your host Robert Smith. This is the sixth year we've done summer school, six years, of taking the biggest ideas in economics and packing them up like a beach read for your ears. If you've been enrolled with us since the very start, your parents might be wondering if you're finally a doctor yet. Soon, soon. Of course, you may be asking, Robert, we have already done whole summers on micro and macro economics. We've learned about investing, entrepreneurship, and the economic history of the world.

What else is there? Well, this summer, we will tackle the biggest economic player of them all, the government. As you might have noticed, the biggest debates in our country right now are about how much government should be up in our business, in trade, taxes, immigration, healthcare, regulations, you name it.

Every day, it feels hard to make any personal or economic decision until we can figure out what the government is gonna do. So every Wednesday this summer, we will hear stories of how politicians sometimes make all of us richer and yeah, sometimes screw it all up. And we'll talk about the big economic question. What is the right amount of government in our lives?

As always, we will have a final exam at the end of the season and a souvenir diploma, plus, and this is big, a live graduation ceremony in New York City in late August. Details in the show notes and at the end of this episode. So, government, the big G. I know we like to imagine the free market, the invisible hand as being independent from political influence. But our guest professor today, Simon Johnson, from MIT Sloan School of Management, says that influence has been there since the birth of economics. So Adam Smith and other early writers on economics

did not see any separation between economics, how the economy functions and politics, meaning who makes the decisions around the rule of law and markets and all the things that make the economy function. I mean, where do you think these decisions came from? They didn't descend from the heavens unassisted. Somebody wanted something to happen, right? Who was that person? What did they want to happen? How, what was the process there?

Simon Johnson was one of those somebodies. Well, at least advising the big decisions. He was the chief economist of the International Monetary Fund, and one of our first regular guests back when Planet Money started. Oh, we also won the Nobel Prize after those interviews. So I don't know, causation, correlation. Well, I was disappointed the prize committee didn't cite those specific interviews, Robert, actually. I bet that probably just an oversight on their part. Just an oversight. What we're trying to do this summer has a big fancy name, a degree in political economy. Simon, why don't you help us define that? I think what political economy is at its best is an attempt to reintegrate economic elements

with political decisions. And the political decisions, of course, take into account who's got power, who's got money, who wants what kind of outcomes. So politics and economics, which are taught separately, they shouldn't be separated at all, I think, Robert. We have to understand one to really appreciate the other. Who's got the power? Who's got the money?

That's what we'll be talking one to really appreciate the other. Who's got the power? Who's got the money? That's what we'll be talking about over the next eight weeks. In a few weeks, we'll talk about taxes, for instance, not as this annoying thing we always have to pay, but as a magic wand the government can use to change our collective behavior. If you want the biggest bang for the buck, you send everybody a check in terms of political bang, right? There's nothing like a good check in your hands.

Also this season we'll have a whole class on how the government regulates every little part of our lives, sometimes for good and sometimes for reasons that no one can figure out. American regulations require that the windshield wipers capture a larger part of the windshield versus European ones. But I mean, what is the even logic behind that? that the windshield wipers capture a larger part of the windshield versus

European ones. What is the even logic behind that? You know I guess Americans might be taller on average therefore they would be looking at a different part. I mean I'm struggling here I agree with you to come up with a rationalization. We'll also have a lesson on how the government encourages innovation by protecting our property and our inventions even when those inventions don't seem all that innovative. There's patents for people for walking dogs while holding on to a leash on a bicycle. There's patents for dumping the remains of a cremated body from an aircraft. But

all this is just the syllabus. After the break we will pick up our first lesson with Simon Johnson and it's one of the biggest questions of all. Why are some countries rich and some countries poor? Okay, class, I know you're excited first day and all, but it's time to sit down. Summer school is in session, and we are lucky to have Professor Simon Johnson with us for our first lesson. What can governments do to make a country rich or poor?

Simon, you won the Nobel Prize last year along with Deron Asomoglu and James Robinson for work that looked at the role of institutions in countries around the world. When we think of institutions, we might think of, oh, I don't know, the Supreme Court or Congress, but what are some of the institutions we might not think of?

Yeah, so when you make comparisons across countries, Robert, you look at things like rule of law, you know, can contracts be enforced? If you go to court as a regular person, do you get a fair hearing? Or, you know, are there issues of bribery, corruption, is all the power in the hands of a few families, for example? Is this country a place where most people have equal protection

before the law? Or is it a place in which a few people, whatever their job titles or family ancestry, a few people have all the power? Yeah, and that has a big effect on economics. If I wanted to start a business, say say I need to know that the rules are fair That I'm competing on the value of my intellect and my products and I need to know that if my business is successful It's not going to be suddenly taken away from me Well, I we don't think enough about expropriation and extraction which means somebody can steal your stuff And and the way that happens in many places is that some powerful person says, look, you're in violation of this rule, or I've just decided my son-in-law wants to live in this house or something like that. And then you could go to court, but you would

lose because the court system is massively biased against ordinary people. We just assume in the United States that powerful people can't come and take our stuff away. We tend to assume it's a level playing field for most people, which it is a lot of the time. And that's a perfect lead in to our first case study of the season. We're going to look at a place without a level playing field and see how it affects a particular business on the island of Jamaica. In 2010, Alex Bloomberg and Hannah Jaffe-Walt brought us this story that starts with three women selling fruit alongside a road outside of Kingston, Jamaica. starts with three women selling fruit alongside a road outside of Kingston, Jamaica.

I sell a little thing out here, but not all the while itself. You know, Alex, normally when reporters go abroad, they hire translators. Right, well, she's speaking Jamaican Patois, but she also speaks a little English. And so here's the scene. This woman, I never got her name, she's one of three women,

and they're all selling fruit out of boxes on the side of the road, right outside this mall. So you're selling these things right here? Yeah, right here. Tell me what you're selling. I say, actually, breadfruit planting, gungo peas, planting. Plantains, gungo peas.

And now it's night. And nobody feed all of it there. So how long have you been out here selling this? Oh, 20 years. 20 years, I can't selling this? 20 years. 20 years? I can not make it. 20 years? Yes.

So this is your business, right? All of you? Yeah, all of us share the business. So this is like on the side of the road somewhere, three women sitting on the side of the road with fruit. Right, and just in cardboard boxes, they don't even have chairs for themselves, there's no stand or anything, but they've got these boxes, of the road with fruit. Right and just in cardboard boxes they don't even have chairs for themselves there's no stand or anything but they're just like they've got these boxes they're selling this fruit. But it is their workplace. I mean you heard she's been doing this for 20 years the three of them every day they go to this big market in the center of town they buy their produce then they set up here and they sell it. So here's the thing though

even though they do this every single day and they've been doing it for 20 years it is totally informal. Their business does not have a name, they have never filed any paperwork with the government, and they definitely do not pay taxes. The government isn't collecting tax from you. No, but we pay the taxes and the food that we buy in the supermarket. Right, right. Yeah.

You hear what she's saying. This is something that people say a lot in Jamaica. She's saying, I don't pay taxes on the income I get from my business, but you know, I do pay taxes when I buy the stuff that I'm selling in my business. Right. Everything I have here, I pay taxes. It would not be a very persuasive argument here with the IRS. No, it would not.

Okay. Ready? Let's go somewhere else. How many? One. One? I sell grapes, apple, orange, banana, etc. To where are we now, Alex?

Now we're in New York. We're right outside our office, actually. This, you know, that guy who sells fruit right down the street on 40th Street? Oh, right downstairs. Yeah, I buy fruit from that guy. Right. His name is Mehdi. He's originally from Bangladesh, and he's been here in this country for just six months. But he's working at this fruit stand, which has been there for a long time and this fruit stand you'll be happy to know totally legal. Do you have to have a permit to sell here? Oh yeah I have a permit.

Oh do you have the permit? Yeah. Oh can I see it? Oh yeah and you're showing it to me right now. This is my permit. This is the owner permit. And this is the push cart permit. And the push cart permit.

Yeah. Yeah. So there's all these permits that you have. Yeah, yeah. And the guy who owns the business, he pays taxes on his business, right? Yeah, yeah, yeah. So he has three permits. Right, he has three permits to sell fruit on the side of the road in New York versus

zero permits to sell fruit on the side of the road in Kingston. And this tale of two sidewalk fruit vendors is the tale of two very different economies. In the United States, most people are like this fruit seller that you just heard from. They work in the formal sector. The businesses have been registered, they have a legal status, and the owners pay taxes. In the Jamaican economy, it's largely informal. But if you think about those three ladies

selling fruit on the side of the street, I'm not sure that it really makes sense for them. Right, I mean, we're joking that they're tax cheats, but their lives are really hard. They're just barely scraping by as it is right now, and how would paying taxes help them? And, you know, well, obviously, first of all, they're probably not making enough money

to actually pay taxes in the first place. But the second thing is, just because you're in the informal sector does not mean that you're not paying taxes. You're just not paying taxes to the government. You are paying taxes to criminals, like these ladies do. They corrupt cops come by, they call them the Metro men. They come around and steal their fruit and lock them up.

And they told me about it. Sometimes when the Metro men come around with the things, they take it away. Take away our stuff and lock it up. Yeah. Yes, they carry it down to jail and we have to go to court and pay. Wait, the police come and take away your stuff?

Yes. We pay them to charge them, Wait, the police come and take away your stuff? So you pay taxes? You pay taxes? Yeah, protection racket. And when did that happen? Last month. Last month the police came, they beat you, took your food. And then you had to go back and buy your food back from them?

We have to beg and go back and buy. When you pay you don't get it back. They carry it to children homes and take it for themselves. Sometimes we cry. Yeah. Hungry, you know? Yeah. God, that would cry. Yeah. Hungry, you know? Yeah. God, that's horrible.

So there's like police walking around that they're afraid are going to come and steal their fruit and beat them up while they're selling? Yeah, or sometimes it's somebody else. I mean, I got the sense that it happened fairly regularly and from various different people. Like, they're sort of defenseless, you know, on the side of the road there. So we're talking about taxes. Like, that is a barrier to economic growth. Yeah, absolutely. And that's a big problem in Jamaica. I mean, there's like, you know,

those criminal gangs that, you know, extort, you know, protection money from people. And so you're in the informal sector, you're still paying taxes. Alex Bloomberg and Hana Jaffee-Walt from 2010. We're listening along with our professor, Simon Johnson, who has done a lot of research on the ways basic rules, like paying taxes and private property, can make the difference between rich and poor nations. Simon, this was about Jamaica, but we could have told this story anywhere in the world,

including the United States of America, where oftentimes there are businesses who operate off the books. I live in Brooklyn, I know. There's arbitrary enforcement of rules all the time. You found a helpful way of looking at this across countries by asking what kind of institutions do they have in their economy?

Yeah, so the terminology that we settled on, and a lot of people have started using, is extractive versus inclusive institutions. So the inclusive one I think is what I would start with because it's the easy place to understand this, which is do these institutions allow you to build a company? Do they allow you to own a house? Do they allow you to drive your car around without being hit by extra fees or demands for bribes or outright confiscation? Honestly, so all of these different kinds of rights that you have as a person, as an economic actor,

if they're inclusive, it means you have the same rights as everybody else. So in the case of the Jamaican women, if there were inclusive institutions, should have had the right to their products, not to be hassled by the police and that sort of thing. That's right. I mean, there would be rules. You might need to have a permit, but the permit would cost you five cents and you'd get it automatically. You know, when you register a car in the United States or get a driver's license, you do have to go to the DMV.

Nobody loves that experience, but it's relatively straightforward. And hopefully in the modern United States, you don't have to pay bribes to anybody to get your license or get your car registered and so on. So that's inclusive institutions. The other thing you said was extractive institutions, which is sort of the opposite. What does that mean? So extractive institutions means that a few people have established the means to take anything and everything that they want. So think, for example, about North Korea, which is a very extreme case. It's run by a dictatorial family and

some allies. They actually, by all all accounts live reasonably well. Most people in that country are immensely poor and sometimes actually starving. And so the ruling elite in a place like North Korea extract all the value from people. Anytime somebody, something good happens to an entrepreneur or somebody tries to build something, if the ruling elite wants it, they just take it. And there's no recourse. There's no court system you can go to. In fact, I'm pretty sure that if you appealed against the actions of anybody in that ruling elite in North Korea, you would never be heard from again by anyone. And what are the results of having inclusive rather than extractive institutions?

I mean, does this result in a richer country or more social mobility or less inequality? What will we look for? So I think the case study is very good on this. So think about Jamaica and the women who are selling the fruit. So they can make a living on a good day, but they have no way to invest, no way to build a business, no way to borrow money, no way to get a return on capital because they could get wiped out at any moment. In fact, if they are successful and do build something that catches the attention of anybody

powerful, they will get expropriated, right? That's exactly how it works. So then you think about it from the view of those women and they're saying, you know what, I just need to make enough money today. I'm not going to invest. If I make an investment, I'm creating a vulnerability for myself. I'm going to, if I make any extra money today, I'll hide that. So in the worst case, Robert, you don't make investments, the private sector doesn't grow.

So why do some countries end up with inclusive institutions and others have these extractive institutions? I know in your work, you've talked about the historical context, how colonialism in some places was very extractive. They would steal gold and send it to Europe. They would kidnap indigenous people for slavery. But then in other places, they would create these inclusive institutions

because they were gonna settle there, right? They were focused on keeping some of the riches in their colonies. So what lesson can we learn from that different history? I do love history. And I think in a nutshell, the answer is that you have to build up a sufficiently strong group of people,

some people would call it middle class, that really wants that stable property rights and rule of law. So if you get a middle class that says, hey, let's have stronger, better rule of law, less extraction, that's not necessarily good for the elite. So I think that actually a lot of places, Robert, don't grow as fast as they could

because the elite likes the current arrangements just fine. And that's a major impediment to shared prosperity around the world. If the rich, powerful people don't want it, you're not gonna get it. But one of the nice things about your work, Professor, is that you've shown that countries can change and that institutions can actually get better. We'll have a story about that from the country of Peru after the break.

Okay, students, eyes forward, or I guess I should say ears forward in this case. Listen carefully now to our second case study. This one was done by David Kestenbaum and Jacob Goldstein in 2015 as a profile of Hernando De Soto. De Soto is a businessman in Peru who saw these extractive institutions we've been talking about and decided to do something about it. The story starts right around 1980. Right around then is when Hernando de Soto moved back to Peru.

De Soto, he's a businessman. He's not an academic, but he keeps chewing over this really abstract question. What is holding Peru back? At first, he's working over this question on the weekends. He's actually walking around talking to the guys selling stuff on the street. After a while I found out that they were in the street but they didn't like me in the street because he needs

running water, he doesn't have running water, he wants to be away from thieves and he wants to have stocks and refrigeration which he can't have in the street. I always figured they didn't have more space, they didn't have refrigeration because they didn't have more space, they didn't have refrigeration, because they didn't have the money, because they just couldn't afford to pay for those things. Here I am, stalled with the same question you are, right? The same question. Now they don't have the money, they don't have this. But at the same time, since I'm befriending them, I'm walking them through their homes, right? I'm going to see where they live and what they do. Then I look at the

roof, because it's flat. Okay, so I look on top and I see, my God, you got cement backs up there. And you've got bricks and you got pieces of iron. These vendors do have at least some money. They've saved enough to build a solid house. They're saving more so they can put another floor on that house. So money is not the thing keeping the vendors

out of the markets. And De Soto sees those bricks on the roof and realizes something else. People in Peru aren't saving the way people in wealthier countries save. Instead of saving money in the bank, what you're doing is you're saving in bricks and in cement bags. These street vendors don't have bank accounts. And De Soto discovers poor people in Peru are missing out on all kinds of basic things we take for granted.

They're basically living outside the system. They don't have a deed that says they own their house. They don't have a permit that says they can run their business. De Soto realizes he has to do more than just wander around and chat with people to really understand what's going on. So the next thing he does, the thing that makes him famous, is he does an experiment. He runs an actual experiment. He wants to see what it would take to actually live inside the legal system instead of outside

of it. So he decides to set up a shirt factory to get all the proper paperwork, all the permits. He rents space in a warehouse. He buys a few sewing machines and a knitting machine, but he has no plan to ever make a single shirt. He just wants to see what it would take. So he hires a lawyer and a few students, and he tells them, go out and do everything you have to do to make this a fully legal shirt factory. Figure out how long it all takes. Here's a stopwatch.

Go. Get on a bus. Find out what you have to do. So they went out, and they did the red tape. So they'd go to an office that they were told was an office that granted the license to operate a machine and then they found that they were told no it's not here anymore the address has changed go elsewhere so you got to take another bus so they actually took the buses. They had to get 11 different permits from seven different ministries.

They were asked for bribes 10 times, had to actually pay bribes twice. They had to do everything in a certain order. There were lots of delays. It took an incredibly long time. In total, you would take your at least 278 days working eight hours a day to get the permit to operate, to do business with a small little factory. And what do you get for eight or nine months of work of taking buses? You get the authority, you get the authority to open your little factory. Just the cost of being able to open that and a cop can't come in and close your factory now. De Soto gets obsessed.

He had set up a little nonprofit to do the fake shirt factory thing. Now he has his team talk to people in other businesses, has them study the rules, and he figures out setting up a shirt factory is actually one of the easier things to do. If you want permission for a new bus route, it takes 26 months. To open a new legal market, the kind of place all those street vendors want to move into, that takes 13 years. These numbers started to answer De Soto's question. If you scrape together enough money

to start a little t-shirt factory, you gotta start selling shirts right away. You can't afford to spend nine months getting permits. So you end up doing what everybody does. You open your factory illegally. You don't wait for the permits. You live outside the law. And if you're outside the law, De Soto realizes,

it's really hard to get ahead. It's really likely that you're going to stay poor. If you're running your business illegally, if you don't have a bank account, you're not going to get a loan to expand your business. You can't start a company. You can't raise capital. And if you can't raise capital, you also, for the same reasons, you can't raise credit. It means you can't expand.

De Soto had found his invisible wall. Unfortunately, it was one of those problems that's really hard to solve. You're talking about trying to fix an entire dysfunctional system, trying to change laws, trying to change the culture of an entire country. Faced with this monumental task, De Soto decides on the thing he knows. He's a businessman, so he launches an ad campaign. We put a lot of radio jingles, a lot of TV jingles. Jingles like ads? Like too hard to start a business.

Yes, absolutely. One of them was called, it was, one of them was called, ¿Qué haría yo si tuviera capital? ¿Qué haría yo si tuviera capital? ¿Qué haría yo si tuviera capital? ¿Qué haría yo si tuviera capital? Quería yo si tuviera capital. Quería yo si tuviera capital. Title of the song, What Would I Do If I Had Capital? Voy a contarles la historia de un país que anda muy mal.

The guy says, I'm going to tell you the story of a country that's doing really badly. Porque un grupo muy pequeño tiene acceso al capital... Because only a small group of people has access to capital. -♪ Negando a la mayoría su derecho al capital... Jacob, can I give you my honest reaction when you tell me that?

Tell me, tell me. There's no way this is gonna work. Well, does it change your opinion if I tell you that badly and capital rhyme in Spanish? Mal capital. Doesn't change my view at all. I mean, one of the problems is something he mentions in the song, right? There are a small number of people who do have access to capital.

Those people don't want things to change. I mean, you've got corrupt officials, right? They all like collecting bribes. You've also got a bunch of rich people who already have businesses. They're well connected. They like the fact that it takes someone else a year to get the permits to open up their business because it benefits them. Less competition. There are so many things set up for the system not to change. And on top of all this, De Soto has one other problem. The Shining Path was a terrorist movement of Peru, ideologically a Maoist movement.

Maoist as in Chairman Mao. These are communist guerrillas. They're waging a civil war in the countryside. And as communists, they have a very different view from De Soto about what is holding the country back. For The Shining Path, the reason people were poor wasn't these obstacles to capitalism that De Soto had discovered. For the Shining Path, the problem was capitalism itself.

De Soto sees this ideological divide. And when he writes a book as part of his big marketing campaign, he makes the title an attack on the Shining Path. He calls his book The Other Path. It becomes a bestseller. The Maoists were not pleased. I wake up one day and they say the clandestine newspaper, the Shining Path, says that

you are going to be punished because you've brought down their recruitments because of the of the fuzzy ideas that you're propagandizing with the jingles with a book etc and they're gonna punish you. That's what I wake up one day. The attack came soon after that. There's a park in front of our offices and they get into a dirt mound in the back of it and they start machine gunning the place. They shot a security guard and then the attackers pulled a car up in front of the building. The car that's loaded with about, I don't know, 200, 300, 50 kilos of dynamite. And they light the fuse and there's a getaway car and they all get back into the getaway car

and leave the car to explode. Three people at De Soto's office were killed. A while later, the Shining Path tried again. They machine gunned De Soto's car, but it was protected by bulletproof glass and a reinforced gas tank. Eventually, the Maoists lost. The leaders of the Shining Path wound up in jail.

And De Soto's moment finally came. He'd become famous, the jingles on the radio, the bestselling book, and he was providing proof of what everyone had suspected for a long time. No one was playing by the rules because the rules were a mess. The rules needed to be fixed. De Soto gets the ear of Peru's president, and the president launches a campaign to simplify the rules, to make it easier for poor people to get titles to their homes

and legal ownership of their businesses. To accomplish this, De Soto needs more than some clever radio jingle. He needs a TV show, so they launch one. It's a TV show about cutting through bureaucratic red tape, starring the president of Peru himself. On the show, the president of Peru himself. On the show, the president hears about the problems people are having, problems

getting paperwork for a business or applying for university or even getting a marriage license, and then the president actually does something about it. The president would say, well this is terrible, and then we'd say, now who's the head of the office that would be ultimately responsible for this? And then my guy would tell him, well, it is office such and such. Okay, well, if he doesn't solve the next five days, he's fired. And then he signs a little decree and then the guy with a nice blue shiny uniform takes it into his hand, gets on a motorcycle, the TV camera follows him, and he delivers it to the political appointee

who's told he's got five days to solve it. So you're basically turning this wonky thing you're doing into reality TV. Yes, that's it. Yes, I never thought of it that way. It was reality TV. And it worked. It worked. The rules in Peru actually got simpler.

It got easier for poor people to have a title to their home or to start businesses or to move into those markets where all the vendors wanted to be. Jacob Goldstein and David Kestenbaum from 2015. Eventually other countries adopted the techniques of Hernando de Soto, and it led to a very clever international movement. The World Bank started compiling things like permit times and tax complexity. They called it the cost of doing business report. After the break, we turn our gaze back to the United States of America.

What would other countries say about our extractive institutions? We are back in summer school with Professor Simon Johnson. Professor, what lessons can we learn from Hernando de Soto's story? I think Hernando de Soto's work, which impressed me when I first heard about it a long time ago and impresses me to today, Robert, was that he identified the problem.

He spent a lot of time talking to people and he also figured out a route forward, something you could actually do and make operational. And I think he had a lot of impact, certainly in Peru and other places, because he showed people that if you just reduce these number of steps, reduce the number of days, simplified basic processes, that you could actually help a lot of poor people help themselves. And De Soto did it by getting regular people on board with his advertising campaign. He essentially shifted who has the power, right?

Which is one of the big questions we talked about at the beginning, who has the power. So are countries with, shall we say, more equitable power dynamics, democracies? Are they necessarily richer countries? Are there countries with, shall we say, more equitable power dynamics, democracies? Are they necessarily richer countries? Personally, I think democracy is absolutely essential for shared prosperity, Robert, because if power isn't widely shared across society in any kind of authoritarian system, you're going to have a situation where, you know, you might have a good ruler or a pro-growth ruler for a while, but then they're going to get cranky, they're going to die and pass it on to somebody else who's really not good for growth. So authoritarian rulers are highly unreliable in terms of sustained prosperity.

What you need is a democracy and the democracy shares prosperity and that shared prosperity with what we call in the United States hardworking American families. I think that's the current term of art. Those people want their rights to be protected and they get really angry if they feel that there's an encroachment on their economic and political rights. And it's that political support for the economic rights that is the foundation for inclusive institutions and what makes it possible to have business investment, growth of the private sector and strong employment, rising productivity, and rising wages.

So essentially a strong middle class. A lot of people with at least some power standing up for a level playing field. Now, of course, there are podcast hosts in Jamaica and Peru who could come here to the United States and do the exact same trick that we did at Planet Money. They could shake their heads at our failing institutions and say, America, you have some problems with your middle class versus your ultra rich.

The playing field in America is not as level as perhaps we'd like to think. Yes, absolutely, of course. I mean, you could deal with rising prosperity, massive fortunes. I mean, these have been features of the American system always, and sometimes we've had more equality and higher taxation and more support

for lower income Americans than over the past 40 years. We went in a different direction. And then, you know, I think that the key point, and this is why political economy matters, Robert, is it's not just about a few people getting rich. It's about those very rich people taking their money and putting it back into politics and saying, aha, you know what, I got these billions of dollars. I can put a hundred million dollars

into an election campaign because it's not a lot of money for me. And I can tilt it this way or that way. And I can get some outcomes for myself. For example, if my businesses are highly regulated, because I don't know, I run a space business or maybe I run an electric car business or maybe I run a satellite business.

So government contracts, government regulation, really important, all those things. Of course, I would like to have a government that's favorable to me. And you know what? I actually have some specific people, Robert, I would like you to appoint as head of the FAA, head of NASA, head of the DOD, to award me contracts or otherwise tilt the playing field in my direction because I can make more money. And I think that's a good for me and good for the future of humanity and good for the future of Mars or something like that.

I'm just so hypothetical I'm making it all up across Rome. As a Nobel Prize winner, you would not call that inclusive. I don't think anybody on the planet, the Earth, would call it inclusive. Now students, before you upload this episode to your artificial intelligence chat bot and ask for a cheat sheet, we are ready with a human made one. In summer school, we always have a few audio vocabulary words at the end to help you remember the concepts. So let's begin with the way that many people deal

with bad government institutions, the informal sector. What does that mean, Simon Johnson? So informal sector means something that is operating outside of the registered formal economy. You don't pay taxes and you're not declaring any of your activities to the officials. Next up, one of the things that can help make a country rich, inclusive institutions. Inclusive institutions means institutions that are the same for everybody. So it's a level playing field with respect to the rule of law, how the courts operate,

how contracts are enforced and so on. And in your Nobel Prize winning work, you also add that inclusive institutions invest in their people, they educate them, they help them succeed. And then there is the opposite, extractive institutions. Extractive institutions means that a few powerful people can steal your stuff. They are able to use economic, political, other means to take what they want.

Just a reminder to all of you students, yes, it's going to be on the test. There is a big test at the end of summer school. And if you pass, you will get a lovely diploma. Not an actual diploma, but a diploma looking digital file nonetheless. Simon Johnson, thank you so much for joining us. Thank you. That's gonna do it for today.

But if you are eager to hear more episodes now, this very minute, well, you can. If you're signed up for Planet Money Plus, we're giving our Plus supporters early access to summer school this season. So you will get each for Planet Money Plus. We're giving our Plus supporters early access to summer school this season, so you will get each episode before everyone else. That's just more time to study. You'll also get sponsor-free versions

of regular Planet Money episodes and the indicator. Joining Planet Money Plus is one of the best things you can do right now to show your support for our journalism and for the work of NPR. So go to plus.npr.org slash planet money to join. Also, don't miss this. One big difference this year in summer school is that we will be having a live graduation ceremony and party in Brooklyn on August 18th. Start to press those robes and get ready to flaunt your newfound knowledge on stage at the Bell House in Brooklyn. Check the show notes for a link to let you buy tickets

or go to npr.org slash money. Just a warning, it will sell out. ["Summer School's Theme"] Summer School's produced by Eric Menel and edited by Alex Goldmark. It was fact-checked by Emily Crawford and Sierra Juarez. Devin Miller is our project manager and the show was engineered by the legendary Neil Roush. Thanks to Joanne Ricard-Houguette, a professor at Loyola University in Maryland, who inspired us to do this

season on political economy. I'm Robert Smith. This is NPR. Thanks for listening.