Economics Nobel Rewards Study of Nations' Prosperity

"Why do some nations prosper while others are poor? To boil down this year's economics Nobel to a single sentence: "Institutions matter."

The Nobel Prize in Economic Sciences was awarded to Daron Acemoglu, Simon Johnson and James Robinson for work that advanced the understanding of economic disparities among countries.

Acemoglu, who was born in Istanbul, and Johnson, who was born in the U.K., are professors of economics at the Massachusetts Institute of Technology. Robinson is a professor of economics at the University of Chicago.

Acemoglu and Robinson were co-authors of "Why Nations Fail: The Origins of Power, Prosperity and Poverty," first published in 2012. Johnson was chief economist of the International Monetary Fund from March 2007 through August 2008.

"I am delighted, it is a real shock and amazing news," Acemoglu said.

The work of the three economists is based on the history of colonialism and the different ways in which national experiences have affected institutions, such as the protection of property rights or the way in which political decisions are made.

In papers and books written over a quarter-century, the three have documented why some nations, such as Britain, the U.S. and Japan, have thrived, while others, such as Sierra Leone, Uzbekistan and North Korea, haven't. 

The crux of their work is that these outcomes aren't driven by differences in geography and culture, but are a consequence of the institutions that emerged in those places.

Their broadest conclusion is that democracies are better at delivering prosperity over the long term, although they acknowledge that authoritarian governments can be effective at exploiting existing resources, such as raw materials or workers. Authoritarian forms of government typically fail to innovate, which is a strength of democracies.

"This sort of authoritarian growth is unstable and doesn't lead to innovation," Acemoglu said on Monday.

Acemoglu said that China's recent economic performance is "a challenge" to that broad finding, and said that democracies have been "going through a rough patch."

"It's essential they reclaim the higher ground of better governance and delivering for the people," he said.

In "Why Nations Fail," Acemoglu and Robinson point to the twin cities of Nogales, on each side of the U.S.-Mexico border. Though the people on either side of the border are broadly the same, sharing the same ancestors, culture, climate and even germs, the people who live on the U.S. side are vastly better off. They argue that the economic differences are driven by differences in the institutions that govern economic activity.

In the U.S., property rights are more secure, as is the ability of residents of Nogales, Ariz., to affect legislation. As a result, they are richer than residents of Nogales in the Mexican state of Sonora.

In their research, Acemoglu, Johnson and Robinson show that these institutional differences between haves and have-nots recur globally.

Central to their research is a view that places that have succeeded have inclusive political and economic institutions that help prop each other up. Inclusive economic institutions, such as an education system, a market economy and functioning financial system, encourage economic participation by a nation's people. Inclusive political institutions ensure that economic power is shared, creating a virtuous cycle.

On the other hand, "extractive" economic and political institutions create an adverse feedback loop, where elites grab economic power, backed up by the state. Under those conditions, people are less willing to engage in the economy, knowing that the fruits of their labor could be arbitrarily taken away.

An awakening experience for Acemoglu occurred when he was a teen in Turkey learning how to drive. With no driving schools, he did what other unlicensed teens did: He went to a secluded place with someone who knew how to drive and practice.

"That day the police decided to do a raid and arrest a bunch of people," he said. "It just showed what arbitrary power can get you, how much insecurity, uncertainty and potential abuse you are apt to suffer." He spent the rest of the night in jail.

Acemoglu went to the U.K. for college, and he entered the doctoral program at the London School of Economics. It was there that he met Robinson, at a seminar in 1992. Robinson was presenting. Acemoglu sat in the first row "and contradicted more or less everything I said," Robinson recalled. "And then he came out for dinner, and we sat next to each other at this Indian restaurant in Covent Garden, and we've been talking ever since."

The work of the Nobel winners addresses one of the biggest questions in economics, and one of its foundational problems: why some countries have become extremely rich by historic standards over the past few centuries, while others have lagged far behind.

In 1776, Adam Smith laid the groundwork for economics as a field of study with a book titled, "An Inquiry Into the Nature and Causes of the Wealth of Nations."

While Smith and many of his successors focused on the division of labor and openness to trade as key determinants of prosperity, the field of institutional economics has received growing attention over recent decades. Douglass North, a key influence on this year's winners, was awarded the Nobel in 1993 for bringing a historical perspective to understanding institutional change and its impact on economic outcomes.

Part of what made the three economists' work different was the data and methodologies they brought to bear on these questions.

Acemoglu met Johnson at M.I.T. in the late 1990s, and introduced him to Robinson. Soon, the three set out to understand why some former European colonies, such as the U.S. and Australia, had prospered, while others, such as much of sub-Saharan Africa, had not. The key was to find some variable that could explain the difference in the systems colonists set up.

After six months of searching, Johnson hit on one: The difference in mortality rates Europeans experienced in different colonies.

The paper the three wrote, published in 2001, argued that where fatal disease was less prevalent, such as in the U.S. and Australia, more colonists settled and were more likely to develop inclusive institutions that gave them an incentive to work and invest in shared prosperity. Where fatal diseases were prevalent, the few colonists who took that risk concentrated on extracting the greatest return in the shortest period.

"That was our first paper together, and that's the paper that really launched us," Johnson said.

Their research has focused on the historical roots of poverty and prosperity, but Acemoglu said he believes that institutions are even more important today.

"I'll be very happy if this prize contributes to having more awareness of the importance of building better institutions, building better democracy," he said. "I think those are urgent challenges for us."" [1]

It is greed and power. To control huge numbers of people, concentrated power systems are often designed. If power is concentrated in hands of a small group, only this group is prospering, a country remains destitute. China's president Xi succeeded in beating down corruption, so China is working with full potential and prospering. We, the West, drowned in greed and corruption so we are suffering. Where is my Nobel price?

1. Economics Nobel Rewards Study of Nations' Prosperity. Hannon, Paul; Lahart, Justin.  Wall Street Journal, Eastern edition; New York, N.Y.. 15 Oct 2024: A.1.