Today's Nobel Prize in Economics

Please Watch My Recent Podcast With Daron Acemoglu Who Shared the Prize

MIT’s Daron Acemoglu, MIT’s Simon Johnson, and the University of Chicago’s James Robinson just won the 2024 Nobel Prize for their joint work on global development and inequality. Three weeks back, Daron appeared on Economics Matters — the Podcast. Please watch/listen to this discussion of his work to get a feel for the true brilliance of this extraordinary economics team.

Here’s the announcement from the Royal Swedish Academy of Sciences, which summaries the team’s contribution as follows:

When Europeans colonised large parts of the globe, the institutions in those societies changed. This was sometimes dramatic, but did not occur in the same way everywhere. In some places the aim was to exploit the indigenous population and extract resources for the colonisers’ benefit. In others, the colonisers formed inclusive political and economic systems for the long-term benefit of European migrants.

The laureates have shown that one explanation for differences in countries’ prosperity is the societal institutions that were introduced during colonisation. Inclusive institutions were often introduced in countries that were poor when they were colonised, over time resulting in a generally prosperous population. This is an important reason for why former colonies that were once rich are now poor, and vice versa.

Some countries become trapped in a situation with extractive institutions and low economic growth. The introduction of inclusive institutions would create long-term benefits for everyone, but extractive institutions provide short-term gains for the people in power. As long as the political system guarantees they will remain in control, no one will trust their promises of future economic reforms. According to the laureates, this is why no improvement occurs.

However, this inability to make credible promises of positive change can also explain why democratisation sometimes occurs. When there is a threat of revolution, the people in power face a dilemma. They would prefer to remain in power and try to placate the masses by promising economic reforms, but the population are unlikely to believe that they will not return to the old system as soon as the situation settles down. In the end, the only option may be to transfer power and establish democracy.

Comments

Nobel Prize-winning work always has its also rans. But the prize is limited to three winners. The notion that the history of colonization could teach us about differential economic progress is not new. Historian Niall Ferguson’s 2004 fabulous book, Empire: How Britain Made the Modern World, comes to mind as helping establish the importance of the colonial record to economic development. Here’s Amazon’s description.

Empire is a major reinterpretation of the British Empire as one of the world's greatest modernising forces. It shows on a vast canvas how the British Empire in the 19th Century spearheaded real globalization with steam power, telegraphs, guns, engineers, missionaries and millions of settlers.

The 2024 Nobel Laureates took the connection between development and colonization in a very different direction by focusing on how differences in the nature of colonization mattered to which countries grew and which stagnated after independence. In short, they plumbed the historical record as deeply as possible, uncovering surprising aspects of development’s sine qua nons.

Certainly the rule of law, which prevailed in certain colonies and went by the wayside in others, is paramount to economic progress. When stealing other people’s output is a fast and reliable path to prosperity, people will focus on protecting what they have, not making something new.

Daron discusses this in our podcast when he compares Nogales, Mexico, which borders on Nogales, Arizona. Everything should be the same in these towns, but they are anything but. In particular, Nogales, Mexico is very poor compared to Nogales, Arizona. Per capita income in Nogales, Arizona is six times higher than that is Nogales, Mexico.

The explanation is institutions. Leges sine Moribus vanae is the University of Pennsylvania’s Latin moto. It means laws without customs are useless. Stated differently, if laws are routinely ignored, there is no law. And Mexico, as we all know, has been a largely lawless state for as long as any of us can remember.

Having just returned from three weeks in China, I found the Prize Committee’s reference, in its last sentence, to democracy interesting. China and, for that matter, Singapore and Korea, have experienced and are continuing to record amazing economic progress. But their economic progress has not, in the main, depended on democracy — rule of law yes, but not democracy. Milton Friedman’s famous book, Capitalism and Freedom, suggested each was essential for progress. But that doesn’t seem to be the case. Moreover, the relative economic decline in Japan in recent decades appears to have had nothing to do with democracy or the rule of law.

In short, the prize is exceptionally well deserved by its winners. But their work leaves many questions unanswered. Chief among these is whether freedom to compete and enforcement of laws to keep one’s product are the real sine qua non for economic development or whether freedom of expression is also essential to long-term progress.

Postscript

There are so many excellent candidates for the economics Nobel Prize — 100 year-old Arnold Harberger and 90 year-old Anne Kreuger, who also just appeared my podcast, were high on my list — that choosing one or one set of economists over another seems impossible. But the primarily Swedish economists choosing the winners do their arduous and exacting homework year after year. They deserve extraordinary praise and gratitude from economists worldwide.

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