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

Summary

Planet Money Summer School 1: A Government's Role in the Economy is to Make Us All Richer

Release Date: July 9, 2025
Host: Robert Smith
Guest: Professor Simon Johnson, MIT Sloan School of Management

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Introduction to Summer School

Robert Smith kicks off the episode by introducing the Planet Money Summer School, a six-year tradition aimed at distilling complex economic ideas into accessible audio lessons. This season's focus is on the government's role in the economy, a timely topic given the current debates surrounding government intervention in various sectors such as trade, taxes, immigration, and healthcare.

Robert Smith [00:35]: “Every day it feels hard to make any personal or economic decision until we can figure out what the government is going to do.”

Smith outlines the structure of the summer school, promising weekly lessons that delve into how government actions can both enrich and disrupt economic landscapes. The season promises engaging case studies, interactive lessons, and a final exam, culminating in a live graduation ceremony in New York City.

Defining Political Economy

Professor Simon Johnson from MIT Sloan School of Management joins the discussion to define political economy, emphasizing its integration of economic elements with political decisions.

Simon Johnson [03:41]: “Political economy is at its best 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.”

Johnson highlights that economics and politics are inherently intertwined, a perspective that dates back to early economic thinkers like Adam Smith. Understanding this relationship is crucial to comprehending how institutions shape economic outcomes.

Inclusive vs. Extractive Institutions

The conversation shifts to Johnson's seminal work on inclusive and extractive institutions, key determinants of a nation's prosperity.

Simon Johnson [15:29]: “Inclusive institutions mean you have the same rights as everybody else.”

Inclusive institutions provide a level playing field, ensuring that property rights are protected, contracts are enforceable, and everyone has equal access to economic opportunities. In contrast, extractive institutions concentrate power and wealth in the hands of a few, stifling broader economic growth and perpetuating poverty.

Simon Johnson [16:05]: “Extractive institutions mean that a few people have established the means to take anything and everything that they want.”

Johnson explains that countries with inclusive institutions tend to be wealthier and have higher social mobility, while those with extractive institutions often remain poor and unequal.

Case Study: Informal Economy in Jamaica

The first case study examines the informal economy in Kingston, Jamaica, focusing on three women selling fruit on the streets without formal permits or tax records.

Robert Smith [10:23]: “We pay taxes and the food that we buy in the supermarket.”

These women operate outside the formal economy, paying taxes indirectly through purchases but not directly to the government. This informal status exposes them to corruption and extortion, as corrupt police officials demand “protection money,” severely hindering their ability to grow their businesses.

Simon Johnson [07:36]: “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.”

The lack of inclusive institutions in Jamaica means these vendors cannot invest in their businesses or secure loans, trapping them in a cycle of poverty. Johnson emphasizes that without inclusive institutions, the private sector cannot thrive, limiting overall economic growth.

Case Study: Hernando de Soto’s Experiment in Peru

The episode transitions to Hernando de Soto’s efforts in Peru to transform extractive institutions into inclusive ones. De Soto's experimentation with setting up a legal shirt factory revealed the immense bureaucratic hurdles required to operate formally.

Guest Speaker [23:09]: “He just wants to see what it would take to actually live inside the legal system instead of outside of it.”

De Soto's findings showed that obtaining the necessary permits took over 278 days and involved multiple layers of bureaucracy and corruption. Frustrated by these obstacles, De Soto launched a public awareness campaign using radio jingles and a best-selling book, "The Other Path".

His efforts culminated in a government-initiated reality TV show that publicly showcased the simplification of bureaucratic processes, demonstrating that reform was possible. This campaign successfully pressured the Peruvian government to streamline regulations, making it easier for citizens to formalize their businesses and secure property rights.

Simon Johnson [31:40]: “He identified the problem. He spent a lot of time talking to people and he also figured out a route forward.”

De Soto's work exemplifies how identifying and addressing institutional barriers can unlock economic potential and foster shared prosperity.

Implications for the United States

Returning to the U.S., Johnson warns that despite its inclusive institutions, the American system faces challenges due to increasing political influence by the wealthy elite.

Simon Johnson [33:25]: “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... to tilt the playing field in my direction.”

Johnson argues that unchecked political contributions from wealthy individuals and corporations can lead to regulatory favoritism and economic policies that benefit the few at the expense of the many. This undermines the inclusivity of institutions and threatens sustained economic growth and equality.

Simon Johnson [35:14]: “I don't think anybody on the planet would call that inclusive, rogue.”

Conclusion: The Power of Inclusive Institutions

Professor Johnson concludes by reiterating the importance of maintaining and strengthening inclusive institutions to ensure shared prosperity.

Simon Johnson [32:28]: “Democracy is absolutely essential for shared prosperity... it's 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.”

He underscores that a strong middle class is vital for advocating and sustaining inclusive institutions, ensuring that economic growth benefits a broad segment of society rather than a select few.

Key Takeaways and Vocabulary

• Informal Sector: Operating outside the registered formal economy, avoiding tax declarations and official regulations.

  Simon Johnson [35:39]: “Informal sector means something that is operating outside of the registered formal economy.”

• Inclusive Institutions: Systems that ensure equal rights, enforce contracts fairly, and provide opportunities for all, fostering economic growth and social mobility.

  Robert Smith [35:58]: “Inclusive institutions mean institutions that are the same for everybody.”

• Extractive Institutions: Systems where a few powerful individuals or groups can seize resources and wealth, limiting opportunities for the majority and impeding economic progress.

  Simon Johnson [36:22]: “Extractive institutions mean that a few powerful people can steal your stuff.”

Final Notes

Robert Smith wraps up the episode by encouraging listeners to engage with the summer school, highlighting the live graduation event and providing information on how to support the show through Planet Money Plus.

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Produced by: Eric Menel
Edited by: Alex Goldmark
Fact-Checked by: Emily Crawford and Sierra Juarez
Project Manager: Devin Miller
Engineering: Neil Rauch
Special Thanks: Juwan Ricardo Get, Loyola University Maryland

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This episode of Planet Money's Summer School provides a comprehensive exploration of how government institutions shape economic outcomes, supported by insightful case studies and expert analysis. Whether you're new to economics or seeking to deepen your understanding, this episode offers valuable perspectives on the intricate dance between politics and economic prosperity.

Transcript

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[Robert Smith]

A quick reminder, Planet Money plus subscribers get access to summer school episodes one week early. Sign up at plus.npr.org.

[Planet Money Host]

This is Planet Money from NPR.

[Robert Smith]

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 macroeconomics. 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, health care regulations, you name it. Every day it feels hard to make any personal or economic decision until we can figure out what the the government is going to 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.

[Simon Johnson]

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 do they want to happen? What was the process there.

[Robert Smith]

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, he also won the Nobel Prize after those interviews. So I don't know. Causation, correlation.

[Simon Johnson]

Well, I was disappointed the prize committee didn't cite those specific interviews, Robert. Actually, probably just an oversight on their part.

[Robert Smith]

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?

[Simon Johnson]

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, you have to understand one to really appreciate the other.

[Robert Smith]

Who's got the power? Who's got the money? That's what we'll be talking about over the next eight weeks. 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.

[Simon Johnson]

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.

[Robert Smith]

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? You know, I guess Americans might be taller on average, therefore they would be looking at a different part.

[Guest Speaker]

I mean, I'm struggling here.

[Robert Smith]

I agree with you.

[Guest Speaker]

To come up with a rationalization.

[Robert Smith]

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.

[Guest Speaker]

There's patents for people, for walking dogs while holding onto a leash on a bicycle.

[Robert Smith]

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?

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[Robert Smith]

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 Daron Acemoglu 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?

[Simon Johnson]

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 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.

[Robert Smith]

Yeah. And that has a big effect on economics. If I wanted to start a business, 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.

[Simon Johnson]

Well, we don't think enough about expropriation and extraction, which means somebody can steal your stuff. 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.

[Robert Smith]

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 Hana Jaffe Walt brought us this story that starts with three women selling fruit alongside a road outside of Kingston, Jamaica.

[Alex Bloomberg]

You know, Alex, normally when reporters go abroad, they hire translators, right?

[Planet Money Host]

Well, she's speaking Jamaican patois, but she also speaks a little English. And so here's the scene. This woman 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?

[Robert Smith]

Yeah, right here.

[Planet Money Host]

Tell me what you're selling.

[Robert Smith]

Breadfruit. Planting gunga peas.

[Planet Money Host]

Planting plantains. Gunga peas.

[Robert Smith]

I know it's night and no buyer see it. All of it there.

[Planet Money Host]

So how long have you been out here selling this? No, I can't make it 20 years.

[Robert Smith]

Yes.

[Planet Money Host]

So, and. And so this is your business, right? All of you.

[Robert Smith]

The business.

[Alex Bloomberg]

So this is like on the side of the road somewhere, three women sitting on the side of the road with fruit.

[Planet Money Host]

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.

[Robert Smith]

No, but we pay the taxes and the food that we buy in the supermarket.

[Planet Money Host]

Right?

[Robert Smith]

Right. Yeah.

[Planet Money Host]

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.

[Alex Bloomberg]

Selling in my business, everything I have here I pay taxes on. Would not be a very persuasive argument here with the irs.

[Planet Money Host]

No, it would not. Okay, ready? Let's go somewhere else.

[Hana Jaffe Walt]

How many?

[Robert Smith]

One. One. I sell grapes, apple, orange, banana, etc.

[Alex Bloomberg]

So where are we now, Alex?

[Robert Smith]

Now?

[Planet Money Host]

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?

[Alex Bloomberg]

Oh, right downstairs, Yeah. I buy fruit from that guy, right?

[Planet Money Host]

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?

[Robert Smith]

Oh, yeah, I have permit.

[Planet Money Host]

Oh, you have the permit?

[Robert Smith]

Yeah.

[Planet Money Host]

Oh, oh, can I see it? Oh, yeah. And you're showing it to me right now.

[Robert Smith]

This is my permit.

[Guest Speaker]

This is the honor permit, and this.

[Planet Money Host]

Is the Pushkar permit and the Pushcart permit.

[Robert Smith]

Yeah.

[Planet Money Host]

So there's all these permits that you have?

[Robert Smith]

Yeah, yeah.

[Planet Money Host]

And the guy who owns the business, he pays taxes on his business, right?

[Robert Smith]

Yeah, yeah, yeah.

[Alex Bloomberg]

So he has three permits, right?

[Planet Money Host]

He has three permits to self route 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.

[Alex Bloomberg]

But if you think about, like, those three ladies selling fruit on the side of the street, like, it's. I'm not sure that it really makes sense for them.

[Planet Money Host]

Right? I mean, we were 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. Corrupt cops come by, they call them the Metro Man. They come around and steal their fruit and lock them up. And they told me about it sometime.

[Robert Smith]

When the metro man come, we have.

[Hana Jaffe Walt]

To run with the things.

[Robert Smith]

Take away our stuff and lock me up. Yeah. Yes.

[Planet Money Host]

Wait, the police come and take away your stuff?

[Robert Smith]

Yes, we be attack them to charge them, come on away and collect money for themselves.

[Planet Money Host]

So you pay taxes?

[Robert Smith]

You pay taxes, then call it.

[Planet Money Host]

Yeah, a protection racket. Yeah, yeah. And when did, when did, when did, when did that happen?

[Robert Smith]

Up to last month.

[Planet Money Host]

Last month? Last month the police came, they beat.

[Robert Smith]

You, took your food, bring the bun.

[Planet Money Host]

To van, and then you had to go back and buy your food back from them.

[Robert Smith]

We have to pay and go back and buy. We don't. When you pay, you don't. You don't get it. Get it back. Them carry out their children homes and take it for themselves. Sometimes we cry. Yeah, hungry, you know.

[Alex Bloomberg]

God, that's horrible. So there's like police walking around that they're afraid are gonna come and steal their fruit and beat them up while they're selling.

[Planet Money Host]

Yeah. Or sometimes it's somebody else. I mean, it just. I got the sense that it happened fairly regularly and that from various different people, like they're sort of defenseless, you know, on the side of the road there.

[Alex Bloomberg]

So we're talking about taxes like that is a barrier to economic growth.

[Planet Money Host]

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.

[Robert Smith]

Alex Bloomberg and Hana Jaffe 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. 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?

[Simon Johnson]

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.

[Robert Smith]

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.

[Simon Johnson]

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.

[Robert Smith]

So that's inclusive institutions. The other thing you said was extractive institutions, which is sort of the opposite. What does that mean?

[Simon Johnson]

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 accounts, live reasonably well. Most people in that country are immensely poor and sometimes actually starving. And so the. The ruling elite in. 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.

[Robert Smith]

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 would we look for?

[Simon Johnson]

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. If I make any extra money today, I'll hide that. So in the worst case, Robert, you. You don't make investments. The private sector doesn't grow.

[Robert Smith]

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 colon. So what lesson can we learn from that? Different history.

[Simon Johnson]

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 a 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 going to get it.

[Robert Smith]

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.

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[Robert Smith]

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.

[Guest Speaker]

The story starts right around 1980. Right around then is when Hernando de Soto moved back to Peru. And de Soto, he's a businessman, he's not an academic. But he keeps chewing over this really abstract what is holding Peru back? And at first, he's kind of working over this question. On the weekends, he's actually walking around talking to the guys selling stuff on the street.

[Hana Jaffe Walt]

After a while, I found out that they were in the street, but they didn't like being 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.

[Guest Speaker]

I always figured 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.

[Hana Jaffe Walt]

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.

[Guest Speaker]

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 market.

[David Kestenbaum]

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.

[Hana Jaffe Walt]

Instead of saving money in the bank, what you're doing is you're saving in bricks and in cement bags.

[Guest Speaker]

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.

[David Kestenbaum]

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.

[Guest Speaker]

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.

[Robert Smith]

Make a single shirt.

[Guest Speaker]

He just wants to see what it would take.

[David Kestenbaum]

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.

[Hana Jaffe Walt]

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. To operate a machine. And then they find that they were told, no, it's not here anymore. The dress has changed. Go elsewhere. So you gotta take another bus. So they actually took the buses.

[David Kestenbaum]

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.

[Hana Jaffe Walt]

In total, it would take you at least 278 days, working eight hours a day to get the permit to operate, to do business with a small little factory.

[Guest Speaker]

And what do you get for eight or nine months of work, of taking buses?

[Hana Jaffe Walt]

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 down.

[Guest Speaker]

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. 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.

[David Kestenbaum]

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.

[Guest Speaker]

And if you're outside the law, De Soto realizes it's really hard to get ahead. It's really likely that you're gonna stay poor if you're running your business illegally. If you don't have a bank account, you're not gonna get a loan to expand your business.

[Hana Jaffe Walt]

You can't start a company. You can't raise capital. And if you can't raise capital, you can't. You also, for the same reasons, you can't raise credit. It means you can't expand.

[David Kestenbaum]

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.

[Guest Speaker]

Faced with this monumental task, De Soto decides on the thing. He knows. He's a businessman. So he launches an ad campaign.

[Hana Jaffe Walt]

We put a lot of radio jingles, a lot of TV jingles.

[Guest Speaker]

Jingles like ads, like too hard to start a business.

[Hana Jaffe Walt]

Yes, absolutely. One of them was called. It was. One of them was called.

[Guest Speaker]

Title of the song, what Would I Do if I had Capital?

[Robert Smith]

Let's light.

[Guest Speaker]

The guy says, I'm gonna tell you the story of a country that's doing really badly because only a small group of people has access to capital.

[David Kestenbaum]

Jacob, can I give you my honest reaction when you told me that? Tell me, tell me there's no way this is gonna work.

[Guest Speaker]

Well, let me. Does it change your opinion if I tell you that badly? And capital. Rhyme in Spanish, Mal.

[David Kestenbaum]

Capital doesn't change my view at all. I mean, one of the problems is something he mentions in the song, right? There are 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.

[Guest Speaker]

And on top of all this, De Soto has one other problem.

[Hana Jaffe Walt]

The Shining Path was a terrorist movement of Peru, Ideologically, a Maoist movement.

[Guest Speaker]

Maoist, as in Chairman Mao? These are communist guerrillas. They're waging a civil war in the countryside.

[Robert Smith]

And.

[Guest Speaker]

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.

[David Kestenbaum]

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.

[Guest Speaker]

The Maoists were not pleased.

[Hana Jaffe Walt]

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 fuzzy ideas that you're propagandizing with the jingles, with a book, et cetera, and they're going to punish you. That's what I wake up one day.

[David Kestenbaum]

The attack came soon after that.

[Hana Jaffe Walt]

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 gun.

[Guest Speaker]

They shot a security guard. And then the attackers pulled a car up in front of the building.

[Hana Jaffe Walt]

The car that's loaded with about, I don't know, 200, 350 kilos of dynamite. And they light the fuse and there's a getaway car. They all get back into the getaway car and leave the car to explode.

[Guest Speaker]

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.

[David Kestenbaum]

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 best selling book. And he was providing proof of what everyone had suspected for a long no one was playing by the rules because the rules were a mess. The rules needed to be fixed.

[Guest Speaker]

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.

[David Kestenbaum]

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 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.

[Hana Jaffe Walt]

The president would say, well, this is terrible. And then he said, 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.

[Guest Speaker]

So you're basically turning this wonky thing you're doing into reality tv.

[Hana Jaffe Walt]

Yes, that's it. Yes. I never thought of it that way. It was reality tv and it worked. It worked.

[Guest Speaker]

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.

[Robert Smith]

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's 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?

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[Robert Smith]

We are back in summer school with Professor Simon Johnson. Professor, what lessons can we learn from Hernando de Soto's story?

[Simon Johnson]

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 the number of steps, reduce the number of days, simplified basic processes, that you could actually help a lot of poorer people help themselves.

[Robert Smith]

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.

[Simon Johnson]

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 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 hard working 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.

[Robert Smith]

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 know, 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.

[Simon Johnson]

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 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 $100 million 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 good for me and good for the future of humanity and good for the future of Mars or something like that. I'm just all hypothetical. I'm making it all upper crossroad.

[Robert Smith]

As a Nobel Prize winner, you would not call that inclusive.

[Simon Johnson]

I don't think anybody on the planet of the earth would call that inclusive, rogue.

[Robert Smith]

Now students, before you upload this episode to your artificial intelligence chatbot 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]

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.

[Robert Smith]

Next up, one of the things that can help make a country rich, inclusive institutions.

[Simon Johnson]

Inclusive institutions means institutions that are the same for everybody. So a level playing field with respect to the rule of law, how the courts operate, how contracts are enforced and so on.

[Robert Smith]

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.

[Simon Johnson]

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.

[Robert Smith]

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.

[Simon Johnson]

Thank you.

[Robert Smith]

That's going to 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 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 +NPR 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 money Just a warning, it will sell out. Summer School is 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 Rauch. Thanks to Juwan Ricardo Get, a professor at Loyola University Maryland who inspired us to do this season on Political Economy. I'm Robert Smith. This is npr. Thanks for listening.

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