Economics Nobel goes to researchers studying prosperity gap

On Monday, three economists received this year’s Nobel Prize in Economic Sciences for their work in evaluating the effect of economic and political systems on a country’s success.

Daron Acemoglu and Simon Johnson, professors at the Massachusetts Institute of Technology, and James Robinson, a professor at the University of Chicago, “have demonstrated the importance of societal institutions for a country’s prosperity,” said the Royal Swedish Academy of Sciences.

The trio’s research, first published in the 1990s, aims to answer why some countries prosper while others struggle. They also explored why the gap between nations is so persistent.

Their work concludes that different economic and political systems are responsible for the disparity in growth, with more inclusive institutions, such as democracy, fostering greater prosperity.

Gathering evidence to support this claim was “a really, really difficult task,” said Jan Teorell, a member of the Committee for the Prize in Economic Sciences in Memory of Alfred Nobel. He noted that factors influencing societal institutions may also independently affect prosperity, making it “close to impossible” to control for all these variables at once.

Nonetheless, the group did so successfully in two ways. 

First, they looked back in time to European colonialism starting in the 16th century. Colonialism “was a natural experiment that divided the world into very different trajectories,” Acemoglu explained, making it a powerful object of study.

The lasting effects of colonialism on political and economic systems allowed the three researchers to examine the current status of nations that experienced varying levels of colonization.

The three economists found that colonies that had a higher population of settlers are richer countries now. The more settlers a colony had, the more need there was for inclusive economic and political systems that incentivized the colonizers to invest in their colony. These inclusive institutions led to more prosperity down the line.

The second approach the prize-winning team used was theoretical. They questioned why ruling classes don’t replace existing economic and political systems with the ones known to bring growth.

Political power and credibility get in the way, they argued in their research. In a system that benefits the elite class, like a monarchy, there’s no trust between the rulers and the masses. 

If a king promises economic and political reforms, his subjects know he will most likely face no consequences if he reneges. The elites in turn don’t trust that the general population will compensate them for their financial losses if a new, more inclusive system is established. 

This two-sided distrust can trap a society in a non-prosperous set of economic and political institutions.

The team’s work “has huge societal impact,” Teorell said. Their findings demonstrate that promoting democracy “is an important way forward for promoting economic development and closing the world income gap.”

One of the laureates, Acemoglu, is applying these findings in further research on the current “rough patch” for democracy in places like the United States, Europe, and emerging countries.

“It’s fascinating,” he said, “but worrying.”