How The Next Massive Stock Market Crash Unfolds (Uncut) 03-14-2025

Nobel Laureate: How The Next Massive Stock Market Crash Unfolds | Daron Acemoglu

Are you assuming that more consolidation, bigger tech companies would lead to less innovations? And I guess the underlying assumption is that bigger companies are less innovative. Big tech companies in the United States are innovative. They pour hundreds of millions of dollars, sometimes billions of dollars into new projects, new ventures, research and development, various types of innovative activities.

But they’re not very good at it. Earlier this week, the Nasdaq suffered its worst single day loss since 2022. AI and tech leaders like NVIDIA, Apple and Meta plunged as much as 5% on Monday.

In total, tech mega caps lost almost $750 billion in market cap. Is this the beginning of a massive stock market shock or crash followed by the end of American exceptionalism? We’re going to be talking about this theme with our next guest, Professor Deron Acemoglu. He’s the Institute Professor of Economics at MIT and also the 2024 co-winner of the Nobel Prize.

Professor Acemoglu is also the Research Associate at the National Bureau of Economic Research, NBER, and the co-director of MIT’s Shaping the Future of Work Initiative. His latest book, co-authored with Simon Johnson, is Power and Progress, Our Thousand-Year Struggle Over Technology and Prosperity. Professor Acemoglu, an honor to host you today.

Thank you for joining the program. Welcome to the show. Thank you, David.

It’s my pleasure to be with you. It’s my pleasure to host you. I’ve hosted your co-recipient of the 2024 Nobel Prize, Simon Johnson.

People can check out that interview. So it’s a great honor to have his co-recipient yourself on the show now. Let’s start by talking about this week’s tech sell-off.

The Nasdaq composite is down about 13% from its all-time high now as we speak. On the 11th in your Financial Times article, The Real Threat to American Prosperity, you forecast a massive stock market crash driven by misplaced hopes in AI. Can you tell us a little bit more about your thesis here and some of the assumptions behind this statement? Well, I mean, I have no crystal ball.

I don’t foresee the future. And that article was written as a scenario planning, meaning that I was very worried about the direction that the US economy is taking under President Trump and US institutions are taking under President Trump. And I wanted to warn against some unthinkable outcomes within the next two decades that could happen out of this, in particular, loss of US economic dynamism and end of US economic leadership at the global level.

And my guess would be that those, if they come to pass, would be caused by a combination of the institutional damage that the Trump administration is causing plus the tech industry. So I wouldn’t say that what we are seeing right now is that it’s probably more of a cyclical response to the uncertainty and the disruption that Trump’s shorter-term economic policies are causing, in particular tariffs. That’s not to be belittled.

They are real disruptive. Today, we live in a globalized integrated world in which many of the leading US companies rely on supply chains that expand throughout the globe. We can have a discussion about whether that’s a good thing or a bad thing.

So there is a case one could make that supply chains have become too fragmented or too international. But taking that reality as given, if you start slapping tariffs and creating uncertainty, it’s not going to bode well with the health of the economy, and that’s what we’re seeing right now. Before I continue with this article that you wrote, do you think that Trump is really just using tariffs as a negotiating ploy to reduce the already implemented tariffs on America? To Trump’s point, a lot of the countries that he’s implemented tariffs on right now or trade partners already had tariffs on the United States, and this is just a way for them to reduce tariffs, reduce trade friction globally.

I think that would be a very positive, optimistic read, and if that’s true, I think his short-term economic policies would not have the negative effects that some fear. I could not rule that out, but it is undoubtedly the case that he is creating a lot of uncertainty and the tariffs on Canada are real and the tariffs on China are real. So it’s going to have some effects, perhaps as a bargaining tactic.

He’ll then withdraw them. Perhaps you can say for that bargaining stance to be effective, he does need to make people believe that this is real. But the bottom line is the uncertainty is real.

The bottom line is that a lot of companies are worried about their global supply chains. Now, Durant, we have recession fears spiking in the news again. So can you maybe highlight some of these or comment on some of these fears that are taking place in the marketplace or manifesting in the marketplace, rather? What variables do or does the National Bureau of Economic Research look at to determine whether or not the economy is currently in a recession? And can you evaluate this and comment on whether or not we’re in a recession now? Well, the NBER, National Bureau of Economic Research, has a committee that discusses this.

I’m not in that commission, in that committee. So there is attention given to a lot of indicators within that context. But I think we can all recognize a recession more or less when gross domestic product shrinks rather than growing, especially two quarters in a row.

That’s a telltale sign of a recession. Right now, we’re not there. The economy is still growing.

Actually, the last five years, there was pretty healthy economic growth after the rebound from COVID. But again, the fear is that global trade disputes, tariffs are going to damage supply chains. With damaged supply chains, companies are not going to be able to achieve the same productivity and production.

This will lead to layoffs and it will lead to a recession. Now, stepping back a year ago, or even six months ago, many economists and the majority of tech entrepreneurs and tech people from Silicon Valley were talking about the golden age, where already in 2025, we would see amazing achievements from AI, dynamism, productivity growth, more investment. So this also means that none of that will come to pass.

If indeed there is a recession, it means that those promises aren’t being realized. That’s why I do still see, just like in that scenario planning that you’ve mentioned from the Financial Times that I wrote a couple of weeks ago, the AI sector and the tech sector as the tip of the spear, that if you’re going to have rapid growth, it will be driven by these sectors. If you’re going to have a rapid fallout, it will be those sectors that fall first.

So this is what you wrote in regards to what you just said here. So just to back up a bit, your article kind of ran over this fictitious scenario of the US contracting in the 2030s, in fact, slowing down more than Europe. In regards to technology, you said that others saw the government tech complex that emerged in Trump’s second term as a real culprit with AI and cryptocurrency regulations lifted, and the Trump Department of Justice declared that it would not apply any antitrust pressures to tech industry consolidated further, and a few megacorporations came to dominate the entire sector.

This not only slowed down new useful innovations but laid the seeds of the big tech crash of 2030. So this is interesting. Are you assuming that more consolidation, bigger tech companies would lead to less innovations? I guess the underlying assumption is that bigger companies are less innovative or perhaps slower growth? Yeah, I think in economics, there is a debate on this.

Some people, going back to Joseph Schumpeter, the famous Austrian economist who was on both sides of this debate, claimed that a lot of innovation comes from new entrants and smaller companies. But then there was another line, which again, Schumpeter was a big player in that argument, saying that, well, you do need the big companies with their monopoly power that generates cash and big labs and R&D departments to spearhead innovation. So I think you can make either case.

So it’s an empirical question. Yes. What we know from several papers that have been written over the last decade or so, that big tech companies in the United States are innovative.

They pour hundreds of millions of dollars, sometimes billions of dollars, into new projects, new ventures, research and development, various types of innovative activities, but they’re not very good at it. So people find that researchers that leave another company and go to one of the big tech, six or five or whatever, tend to be less productive after they do that transition. That they generate patents, but those patents are not very impactful and they don’t do it as much as they used to.

There is a lot of evidence that many of these companies buy up competitors, but then don’t successfully integrate the new technology. So this doesn’t deny that they are still innovative because they’re pouring so much money. But there is a question as to how much of the US economic dynamism could be salvaged if 20, 30% of the economy came to be dominated by five or six companies? So yes, I would definitely be worried about more consolidation.

And more consolidation doesn’t need to follow. The lifting of regulation may lead to new entrants, but the relaxation of any anti-trust will lead to consolidation. These big companies from Google to Facebook to Amazon are big acquirers.

They acquire rivals, they acquire companies that produce technologies that they could use, companies that produce technologies that could be rivals to them. So if you get rid of anti-trust, and there was a sort of, people disagree about whether that was a good thing or a bad thing, but under Lina Khan, there was a new energy in anti-trust. You completely get rid of that and you even say that the Department of Justice won’t even go after the most blatant mergers that increase market concentration.

That will give additional impetus to the mergers and acquisitions in the United States. Just to note on competition, you are a professor at MIT, globally recognized as probably the top tech school in the world. I wonder what your opinion is on whether or not America could retain its tech dominance well into the future compared to competitors like China, for example.

I think it’s a question. Again, US has many advantages. If you look at Chinese tech workers, the first generation of them were all trained in the United States.

Now, China trains amazing engineers, but the US was the origin of a lot of the early Chinese tech dynamism. AI, US has a lead and US knowledge flows to China. DeepSeek is an amazing achievement, but if you look at what DeepSeek is doing, it’s doing excellent engineering using tools, methods, and approaches that were all spearheaded in the United States in US academia, some of them 30, 40 years old, like the mixture of expert models, some of them very recent by companies such as Google or OpenAI.

So, US has an advantage, but if it doesn’t maintain its support for academic research, academic independence, if it doesn’t prevent complete consolidation of the industry, yes, that’s in danger as well. Now, China doesn’t have freedom of innovation and freedom of speech, freedom of academia. I have studied a little Chinese academia, and the fact that there are a lot of political pressures on academics does have an effect, but US could do worse than that.

China, at least, is very generous in its support for research and creates very high-powered incentives for researchers outside and inside of academia to be innovative. So, if US reverses its leadership, it can fall behind China, of course. Has there been a relationship throughout history between protectionist policies and technological innovation? That’s more complex.

I think there is a more robust relationship between protectionist policies and global economic problems. So, big tariff increases, especially tariff wars, such as those that happened in the 1930s with the Smoot-Howley Act, do create various major economic problems. Protectionism is a bit more complicated because, protectionism and, sorry, innovation is a bit more complicated because sometimes protectionism may also keep knowledge from flowing between countries, and that may advantage one country or another.

And protectionism may also give impetus to industries to meet domestic demand. So, I think, right now, the world is so integrated in terms of AI that protectionism in traditional industries may not change AI dynamics so much, but it’s hard to know. Okay, well, I want to just shift gears now and talk about your work that led to you being awarded the Nobel Prize jointly with Simon Johnson.

So, in this article it says, the long-term research collaboration between Esamoglu, Johnson, and Robinson, which extends back for more than two decades, has empirically demonstrated that democracies, which hold to the rule of law and provide individual rights, have spurred greater economic activity over the last 500 years. Okay, Yeah, and I think we’ve done a number of different studies, and I think, broadly speaking, they point in a similar direction, which is that institutions that provide incentives to people to invest and innovate, and opportunities for them to do so, are very good for economic growth. Now, that’s not always democracy.

Britain in the 19th century was not fully democratic. Britain in the 18th and 17th centuries was certainly not. But it had a more open economic system, or what we call inclusive institutions, relative to China or India or Spain.

And it’s no surprise that that’s where you see the more greater economic dynamism. You don’t see that economic dynamism in Britain in the 15th century, where the UK, Britain, or England at the time, was not particularly inclusive. And especially with Simon Johnson and James Robinson, I focused on the colonial world, where you see these big differences across societies in terms of the institutions that they inherited, or they had imposed by European powers.

And then you see the same consequences. Those that had more inclusive institutions, for a variety of reasons, often because they could resist more extractive colonization strategies from Europeans, in the 19th century, when industrialization opportunities arrived, were the ones to take advantage of them, and they surged ahead of the rest. So the United States, which was a backwater relative to the Central Valley of Mexico, for example, was actually the area that nobody wanted to colonize.

All the European powers wanted Mexico, or what is Peru now, or the rest of South America. But then in the 19th century, the US surged ahead, because it had institutions that enabled new people to take advantage of industrialization and commercial opportunities. And in the 20th century, we show the same thing with democracies.

Democracies are sometimes much maligned, as ineffective, slow, et cetera. But what we show is that countries that democratize grow faster than they used to before democracy. So they all sort of broadly point in the same direction.

I have two follow-ups. The first is, can we just ascribe your research to capitalist countries? And then throughout history, there’s been a relationship or a positive correlation between a capitalist society and a democratic one. So maybe it’s just due to capitalism, not due to the fact that they’ve been democracies.

Yeah, I think I wouldn’t agree with that, because yes, true, democracies are almost always market-based systems. So you can call them capitalist. But there are also a lot of market-based systems that are not democratic, and they’re not inclusive.

So US, Sweden, Egypt under Mubarak, Argentina under Kirchner, Mexico under the monopoly of the PRI party, the Institutional Revolutionary Party. Those were all market systems. They had private ownership, but they created very different incentives.

So a lot of that variation is within that. And then there’s China. Look, we could have a long debate about whether China is capitalist, whether it’s state socialism, state capitalism, top-down capitalism.

But obviously, it’s one of the fastest growing countries over the last 40 years. And again, I think not everything about China fits our theory, but a lot of it fits our theory. You understand the Chinese growth as very clearly being in line with the arguments we’re making when you recognize that in 1970s, China was an economic basket case.

When agriculture was completely regulated, nobody had any incentives to invest. Nobody had any opportunities to invest. The state-owned enterprises were hugely inefficient.

And there was no private enterprise in the commercial or industrial sector. And then with a modicum of reforms, first agriculture, then industry started opening up. And that’s when Chinese economic growth started lifting up.

Under Deng Xiaoping, I don’t think you would call China a capitalist economy as classically understood. But within socialism, within market models, like capitalism, you have a lot of differences in terms of incentives and opportunities. And that’s what our theory focuses on.

Is China a standout case for you, Professor? Or are there other examples of China? China is a big challenge. I think until about five, six years ago, China was very similar in terms of its behavior to some other cases, you know, that you open up the economy, you grow, and then you have top-down innovation effort like Soviet Union did. But over the last five, six years, China politically became much more repressive.

But at the same time, it also poured a tremendous amount of money in innovation and AI, and it’s becoming successful in those activities. So it is a challenging case that we have to understand. So is Singapore.

But by and large, you know, the big movements in economic change over the last 30, 40 years, I think fit our theory quite well. Is there a causal relationship, meaning our historically have free market societies led to democracies? In other words, do you think that China will one day become a democracy because they’ve been opening up to more free market enterprises? I don’t think so. That is what you’ve just articulated, David, is a very famous thesis in social science that goes under the name of modernization hypothesis.

The idea, going back to the early mid-20th century, many thinkers said, just allow economies to grow. Sometimes we grow and become more educated and they will become democracies. And in fact, that’s sort of the idea that all countries are going to tend to the same place.

They’re all going to some sort of classic Western type of society. We now see that’s not true at all. First of all, many countries have grown a lot and they haven’t become democratic, not just China.

Singapore is one of the fastest growing countries. It is normally a democracy, but it has not become as open in a political system as, say, even South Korea. Saudi Arabia had very rapid growth during certain periods as when oil prices increased, it didn’t become more democratic.

So there are many other examples like this. In the data, there is no correlation between income growth and becoming democratic. But more importantly, we’re also seeing that there isn’t like a unique type of system that everybody’s going to tend to.

In Africa, you have political institutions that are very different than those we see in Asia. In Asia, especially in China, you’re seeing a very different evolution of economic political institutions. And in the industrialized countries of the West, you see very different dynamics.

So I think there are multiple stable trajectories for politics that some societies can follow. Do you see any scenario in which the U.S. becomes more autocratic, in which free market enterprises dwindle in the U.S. and growth slows? Absolutely. That’s why I wrote that Financial Times article.

In the U.S., I think there is a dismissive attitude sometimes towards those dangers because the U.S. has been a democracy ever since independence or a republic. People trust the Constitution. But every institution is vulnerable.

And what we are seeing with the Trump administration right now is a more authoritarian attitude. But even more importantly, we are seeing strengthening of the presidential powers and weakening of various checks. Agencies are becoming more subservient to the government.

You know, classically, FBI, Department of Justice, the Central Bank, Federal Reserve, were all independent agencies. They wouldn’t do the president’s bidding. In fact, the Department of Justice can investigate the president.

The FBI can investigate the executive branch. All of these are changing right now. So with those, there is a real risk of institutional slide.

And that’s the reason why I wrote the Financial Times article. Finally, let’s comment on the Ukraine war. I know you have some thoughts here.

So as we’re speaking today on the 11th of March, Secretary of State Marco Rubio was in Saudi Arabia. The Trump administration might restart intelligence sharing and military support to Kiev if high-level talks between the US and Ukrainian officials on a potential peace process make headway on Tuesday, Marco Rubio said. My hope is that we are going to have a really good meeting tomorrow, and we will be in a different place very soon.

What is your assessment of the current situation in Ukraine? Trump has promised peace on day one. That hasn’t happened yet. Can we see peace in 2025? Look, I think you made a very good point, David, that Trump’s tariffs could be a bargaining ploy.

So this is the same situation in Ukraine so far as I’m concerned. I don’t know what is real and what is a threat to bring Ukraine to the negotiation table. And I have mixed feelings about that.

On the one hand, and I think everybody should have mixed feelings, by the way. On the one hand, people are dying. Unnecessarily, a peace treaty between Russia and Ukraine would save a lot of lives.

And I think that would be a big achievement if it happened. On the other hand, Ukrainian people have valid concerns about a peace deal that doesn’t give them security guarantees, because Putin has said he doesn’t recognize Ukraine. So he’ll invade again in one or two or three years time.

So those are the things to worry about. So if the US administration and Biden should have done that, I think it’s a big failure on Biden’s part to try to broker a peace deal with proper security guarantees. Trump is saying he wants peace, but he’s not willing to offer any security guarantees, which could really leave Ukraine in a very difficult position.

And we are already seeing Ukraine in a very difficult position because a lot of American aid and support, logistic help has been cut. And there has been a very acrimonious meeting between President Zelensky and President Trump and Vice President J.D. Vance. So I think we are in a fluid situation.

I think it would be a terrible thing if Putin thinks that the West is weak and disunited, that he can invade Ukraine, perhaps he can invade other places. I hope it doesn’t come to that. But on the other hand, I would love to see peace.

I think everybody would love to see peace so that innocent lives are not lost. How do you feel about the prospect of exchanging rare earth minerals for continued military support? To Trump’s point, it shouldn’t be free, should support to an ally be free? Look, those are complex issues. I think it’s a bit of a side issue because these rare earth minerals are not worth all that much.

And I think it would not be the best example if the US takes a very transactional approach to these things. I think the best reason to defend Ukraine is that it’s illegal, according to international law, for Russia to invade another country. And Russia is a threat to its neighbors.

And supporting Ukraine, supporting democracy is a value that the United States stands for. I think when we abandon that, it’s bad news. Final question.

Do you see any threat to NATO, the dissolution of NATO? Is that something that’s happening or could happen? Again, I think, can anybody rule it out? I don’t think you can at this point. I hope it doesn’t come to that. NATO has played a very useful role.

Of course, it struggled finding a new role for itself after the collapse of the Soviet Union. But I think these sorts of alliances are useful. We live in a globalized world where most of the problems we deal with, security, nuclear weapons, pandemics, AI, are all global.

So we need more global cooperation. If NATO is a vehicle for creating cooperation among diverse countries, it’s great. We need more of them.

Okay, great. I appreciate your insights, Professor. Thank you very much.

Thank you, David. Great talking to you. Thank you.

Where can we learn more from you and perhaps study your work? Oh, you can visit my website and I also post on Twitter from time to time when I have time to do it. Okay. Well, we’ll put your social media links down below.

Thank you very much, Professor. We’ll speak again soon. Thank you very much, David.

Have a good day.