On October 14th, the Turkish-American economist Daron Acemoglu (MIT), the British political scientist and economist Simon Johnson (MIT), and the British-American economist James A. Robinson (University of Chicago) have been awarded the 2024 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel “for studies of how institutions are formed and affect prosperity”. D. Acemoglu is only the third Nobel laureate of Turkish nationality, following the prizes to biologist Aziz Sancar in chemistry in 2015 and to Orhan Pamuk in literature in 2006. All three awardees studied in the United Kingdom but have spent most of their careers at US universities.
The prize comes in the wake of last year’s award to Harvard professor Claudia Goldin and emphasizes the increasing importance that explaining all forms of inequality has acquired in our profession. Economics is not only, the Nobel economic sciences committee seems to be telling us, about the efficient allocation of resources but also about the implications of such allocation for equity. C. Goldin’s prize rewarded her work on various forms of inequality between women and men, inequalities that she documented using data that went back to the 19th century. This year’s winners have worked on inequality across countries, advancing our understanding of why there are persistent differences in levels of (per capita) income and putting at the centre of their explanation institutions, which in many cases, they claim, were shaped by our colonial past.
That good institutions would result in economic prosperity seems evident, and a Nobel Memorial prize in Economics was already awarded to Douglas North in 1993 for emphasizing this relationship. The concern is that a correlation in the data may be capturing not the effect of institutions on output but the fact that as economy becomes richer, it can afford to spend more in building good institutions. In one of their most cited articles, the laureates have shown that we can explain the current distribution of income across countries by looking at the socio-economic institutions that were introduced during colonisation. They argue that when colonies were less rich before the arrival of the Europeans, the latter were able to “export” European, growth-conducive institutions, thus creating an institutional context that eventually made these countries richer. Focusing on these experiences, the laureates showed that there is indeed a causal effect running from institutions to long-run growth.
A theory that makes institutions the key element in explaining cross-country inequality would not be complete without seeking to also understand how institutions change. D. Acemoglu, S. Johnson and J. A. Robison have thus also explored some of the mechanisms that may drive institutional dynamics. For example, they have asked what drives autocratic leaders to extend suffrage thus turning an autocracy into a democracy. One trigger is the threat of revolution. Placing inequality at the centre of institutional change, they argue that those in power face a dilemma: they would like to stay in power and avoid a revolution by the masses by promising economic redistribution, but the latter will not believe that reforms will be implemented. In order to ‘tie their hands’, the elite may choose to transfer power and establish a democracy, thus ensuring that the policies preferred by the masses are implemented.
The approach put forward by D. Acemoglu, S. Johnson and J. A. Robinson has been criticised for leaving little room for policy-making. A country’s historical past, they maintain, is the crucial determinant of its institutional quality, which in turn shapes its relative wealth. Moreover, when institutions change, they do so as the result of a combination of deeply ingrained economic and social features that cannot be rapidly changed by policy. There is much truth in saying that these theories and evidence imply a considerable degree of historical determinism and often make it hard to alter the existing distribution of national wealth across the world. But we can neither affect how fast the Earth turns around the Sun, yet this does not prevent us from recognizing how fundamental Galileo’s contribution to our understanding of the world has been.
Cecilia Garcia Peñalosa, Marseille, October 14 2024
