By Taiwo Owoeye
The oldest question in economic science is the most important question of the discipline. It is a simple question: Why are some nations rich and others poor? The 2024 Nobel Prize in Economic Science was awarded to Daron Acemoglu, James Robinson and Simon Johnson for providing new insight into answering this important and enduring question. Specifically, the trio have ‘helped us to understand differences in prosperity between nations’.
Yet, that was exactly what Adam Smith did in his classic book ‘Wealth of Nations’ published in 1776, which remains the foundation of economic science. So, why would the same question still dominate economics today?
The reason is that economists cannot provide enough answers to this question because of the dynamics of history.
Adam Smith showed how individuals in pursuit of their selfish interests, freedom and liberty, and limited government interventions could lead to prosperity; and his answer still endures to date. Acemoglu, Robinson, and Johnson showed how the impact of colonisation led to poverty in some former colonies and prosperity in others.
They identified differences in the evolution of institutions and the rule of law as the reasons for the paradoxical outcomes of prosperity and poverty among nations with the same history of colonisation.
As prosperity spread across the world in the post-Second World War era, there is the need to understand why some countries were left behind as more people crossed the poverty line than any other time in human history. The three laureates provided ‘studies on how institutions are formed and how they affect the propensity of prosperity’
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In their hugely popular book, Why Nations Fail’, two of the three laureates, Acemoglu and Robinson, explain their technical findings to a global audience in simple language by tracing how colonisation by Europeans changed the course of history for different nations of the world. Colonisation not only impacted every society that experienced it fundamentally, but it also resulted in different economic outcomes. It led to prosperity in some nations and poverty in others. In nations where European colonialists settled, they established strong and inclusive institutions, resulting in rule of law and prosperity; while in nations where they came to extract resources and left they built weak institutions and poor rule of law, which led to poverty.
This divergence in global income explains why Mexico is poorer than the United States while Haiti and most African nations are poorer than both of them. While the differences in per capita income level between Mexico and United States provide a moderate picture of how the evolution of institutions define poverty and prosperity, the huge difference between that of Haiti and United States illustrates extreme cases of poverty and prosperity for two nations that were once colonies of European powers.
Economists have struggled for ages to understand the sources of the vast differences in income per person across different nations simply because poor people who dominate poor countries are not poor because they are lazy or made wrong choices. Rather, they are poor because they live in poor countries. Poverty is defined by extractive institutions that stunt economic development. Prosperity is defined by inclusive institutions that promote economic development. Poverty is not a micro problem. It is a macro problem.
Before the path-breaking works of this year’s laureates, economists have identified geography, culture, climate, agriculture, and the diverse capabilities among others as the sources of differences in income level.
However, these three economists have narrowed the driver of income inequality to how institutions and the rule of law have evolved using historical examples that date back to many centuries. The arguments and the examples they provided in successive technical papers are factual and convincing.
The recognition of the works of Acemoglu, Robinson and Johnson reinforces the emerging trend by the Nobel Committee to reward contributions that explore the causes of poverty and underdevelopment among poor countries of the world and this is good for the discipline of economics.
When the Nobel Prize in Economic Science was awarded to Abhijit Banerjee, Esther Duflo and Micheal Kermer in 2019, it was ‘for their experimental approach to alleviating global poverty’ an indication of how important poverty alleviation policies have come to dominate discourse in economics. The 2019 award was important for three reasons. First, it was the second time a woman would be winning the award in person of Esther Duflo after it was awarded to political scientist Elinor Ostrom in 2009 ‘for her analysis of economic governance of the commons’. Specifically, Ostrom won the prize for using political theories to show how common property (grazing fields, lakes, and underground water) could be allocated efficiency by members of a given community without government regulations or market forces.
Claudia Goldin became the third woman to win it when she did in 2023 for her historical research on women contributions to labour market and national output.
Second, Esther Duflo won it at the age associated with winners’ contributions to economic science, not of the laureates. She was 47 years old when she won it. She was the youngest ever to win the prize. Third, by awarding the prize to studies on global poverty alleviation in 2019 and how institutions and colonial history explain poverty and prosperity in 2024, the Nobel Committee shows that they care about how to improve the conditions of the poorest people in the world.