The Award
In October 2024, the Royal Swedish Academy of Sciences awarded the Swedish Central Bank Prize in economic sciences in memory of Afred Nobel. The three joint laureates were Daron Acemoglu and Simon Johnson of the Massachusetts Institute of Technology, and their colleague at the University of Chicago, James Robinson. The prize was jointly awarded “for studies of how institutions are formed and affect prosperity.”
The citation continues: “they have helped us understand differences in prosperity between nations. This year’s laureates in the economic sciences have demonstrated the importance of societal institutions for a country’s prosperity. Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better. The laureates’ research helps us understand why.”
When Europeans colonized large parts of the globe, starting in the 16th century, the institutions in those societies were changed abruptly and radically. This was sometimes dramatic, but did not at all occur in the same way everywhere – each of the colonizing countries brought different forms of governance to each of the very different societies affected across much of the world. In some places, the aim was to exploit the indigenous population and extract resources for the colonizers’ benefit. In others, the colonizers formed inclusive political and economic systems for the long-term benefit of European migrants, and eventually, over the very long term, those institutions were pried open and reformed to include the indigenous peoples. This, then, was the subject matter for the laureates’ research.
This research has shown that one explanation for differences in countries’ prosperity is the societal institutions that were introduced during colonization. Inclusive institutions were often introduced in countries that were poor when they were colonized, 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. The concept of socially inclusive institutions versus extractive institutions is the central idea; the statistical population that served as the information resource for these studies covered very large swathes of the world, in all its diversity.
Some countries become caught in a situation with extractive institutions and low economic growth, and many are still trapped in those circumstances, but now without foreign colonial masters. 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 those in power will remain in control, no one will trust their promises of future economic reforms. According to the laureates, this is why no improvement occurs, decade after decade.
Perhaps in seeming contradiction, however, this inability to make credible promises of positive change can also explain why democratization 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 is 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 to preserve the gains acquired over the years by those in a position to exploit and to exclude may be to transfer power and establish democracy.
“Reducing the vast differences in income between countries is one of our time’s greatest challenges. The laureates have demonstrated the importance of societal institutions for achieving this,” says Jakob Svensson, Chair of the Committee for the Prize in Economic Sciences.
A deeper look[1]
The poorest 50 percent of the global population earns less than a tenth of total income and owns just 2 percent of total net wealth. This inequality is primarily driven by disparities between countries, which contribute to approximately two-thirds of global income inequality. Such large and sustained cross-country income differences are inconsistent with the basic neoclassical growth model, which predicts that, all else being equal, poor countries should catch up to rich countries over time. Yet we do not observe such a convergence in income per capita across countries.
In life though not in theory, all else is not equal. Poor countries differ from rich countries when it comes to the proximate drivers of income and growth, such as investment, population growth, human capital accumulation, and productivity. Moreover, they differ in the nature of institutions – those humanly devised constraints, both formal and informal, that shape interactions in economic and political spheres – and that have been highlighted in the laureates’ studies over decades as fundamental drivers of prosperity. This observation already showed up in the work of Douglass North, the 1993 Nobel Economic Prize Laureate, whose postulates these current laureates carried forward and enhanced.
The question then becomes why poor countries do not simply emulate the proven models of what rich countries have done and catch up over time? The 2024 Nobel laurates have helped answer this basic point. At a general level, the central tenet of their research is that the wealth of nations is fundamentally shaped by political institutions. That is, there is a hierarchy of institutions, with political institutions influencing economic institutions, and economic institutions then affecting economic outcomes. More specifically, the laureates’ work has improved our understanding of why some countries, but not others, adopt institutions favorable for economic growth. In doing so, they have deepened the public’s understanding of why convergence in income between countries is not taking place.
In the broadest sense, the contributions of Acemoglu, Johnson, and Robinson are twofold. First, they have made significant progress in establishing the methods for serious research in this complicated and empirically difficult task of applying quantitative evaluations on the importance of both formal and informal institutions for prosperity. Second, their theoretical work has also advanced the study of why and when political institutions change. Their contributions provide substantive answers to critical socioeconomic questions as well as novel methods of analysis.
[1] https://www.nobelprize.org/uploads/2024/10/advanced-economicsciencesprize2024.pdf. This paper explains the academic background to the awarding of this prize.