Daron Acemoglu, Simon Johnson and James Robinson are honored for their work on how institutions form and affect differences in prosperity
By Paul Hannon and Justin Lahart of The WSJ. Excerpts:
"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. However, authoritarian forms of government typically fail to innovate, which is a strength of democracies."
"In “Why Nations Fail” Acemoglu and Robinson point to the twin cities of Nogales, on each side of the border between the U.S. and Mexico. Even 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 of the border 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."
"these institutional differences between haves and have-nots recur globally."
"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 onto 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."
"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 historic perspective to understanding institutional change and its impact on economic outcomes."
"the three set out to understand why some former European colonies, such as the United States 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 in one place versus another. Johnson took on the job of trying to find one.
“I think I spent six months reading history books, looking into atlases, pursuing a lot of false ends,” he said. And then he 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 United States and Australia, more colonists settled, and they 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. According to the laureates, those differences explain the subsequent differences in prosperity between those colonies, and long after they regained their independence."
Also see A Nobel Prize in Economics for the ‘Inclusive’ Free Market: The three laureates’ research demonstrates the importance of property rights and the rule of law by David Henderson. Excerpts:
"The Nobelists’ contribution is to lay out empirical data on the specific economic institutions that helped or hindered economic growth and then to examine the factors that led to those institutions. They point out, as Adam Smith did, that property rights and the rule of law are key. Governments respect these two pillars, they argue, because the political elites share the benefits of economic growth with the “masses” rather than extract the masses’ wealth.
In their 2012 book, “Why Nations Fail,” Messrs. Acemoglu and Robinson divide countries into two types: extractive and inclusive. In extractive countries, a small elite extracts wealth from the masses, whereas in inclusive countries, political power is shared. When governments are extractive, people have little incentive to produce. But the opposite is true when governments are inclusive, as people have property rights and can accumulate wealth.
Why do political elites sometimes favor property rights and the rule of law and sometimes oppose them? The three Nobelists’ research examines European colonization of other continents. They show that where there was a relative absence of diseases, such as malaria, there were more colonizers. These colonizers were too numerous to get rich by exploiting the natives, so they created wealth-building institutions. But where colonizer mortality was high, the colonizers who survived simply extracted wealth from the natives."
"Adam Smith observed that natural resources were less plentiful in the future Canada and the U.S. than in Latin America. But the economic institutions that Spain’s government set up in Latin America were less geared toward the free market and property rights than those that the British set up in the northern part of North America."
Related posts:
What do Nobel Prize Winners Muhammad Yunus and Edmund Phelps Have in Common? (2006)
What The 2010 Nobel Prize Winners Studied (2010) ( Peter Diamond, Dale Mortensen, and Christopher Pissarides)
Some Information On This Year's Winners Of The Nobel Prize In Economics (2011) (Thomas Sargent and Christopher Sims)
Angus Deaton Wins The 2015 Nobel Prize In Economics (2015)
Some Information About This Year's Winners Of The Nobel Prize In Economics (2016) (They are Oliver Hart and Bengt Holmström.)
