The 2024 Nobel Prize
Stare at this picture, long and hard:
It becomes, as the famous quote in economics goes, difficult to think about anything else.
Economists have long wrestled with the question of why some nations grow and prosper while others stagnate. This is not a new question, and there are many more candidate answers than one can go through in a single sitting. But what model or framework do economists use to think about this topic?
The starting point for thinking about growth, at least for economists, often begins with a production function. This is a model where we imagine the economy as a machine that takes inputs like capital and labor, and turns them into output—the goods and services that make up a country's GDP.
Early growth models emphasized these inputs: if you increase the amount of physical capital (think factories and machines) or labor (think workers), you could increase output. But there was a problem—it became evident that capital and labor alone weren't enough to fully explain the differences in growth rates we observed across countries. Even adding "education-augmented labor," where workers become more productive through better skills and knowledge, wasn't quite sufficient to understand the disparities.
This led to the introduction of something called Total Factor Productivity, or TFP. TFP, often referred to as the "Solow residual" (named after Robert Solow, who pioneered this model), is essentially the portion of growth that can't be explained by just adding more capital or labor. It's the mysterious "extra" that accounts for innovation, technological progress, and the efficiency with which inputs are used. For a while, TFP was a catch-all term—it explained what we couldn’t quite put our finger on. But even then, it became clear that this "residual" wasn't telling the whole story.
This is where institutions come in. As Douglass North famously put it, institutions are "the rules of the game in a society, or more formally, the humanly devised constraints that shape human interaction." Economists like Acemoglu, Johnson, and Robinson (AJR) argued that institutions—the rules, norms, and organizations that shape economic interactions—are crucial to understanding why some countries are rich and others are poor. Good institutions create an environment where individuals can invest, innovate, and take risks without fear of arbitrary expropriation. In other words, institutions help determine whether the economic machine purrs like a Ferrari or sputters along like a beat up Bajaj scooter from the '80's.
But what makes economists' approach to institutions different from that of other social scientists? For one, it's not enough for us to simply claim that institutions matter. We need to quantitatively establish that they do. We want to move from a compelling story to hard evidence—and that is what AJR set out to do. They didn't just theorize that institutions matter in a causal sense; they tried to prove it empirically, using data and statistical tools. This meant comparing countries, using historical events as natural experiments, and finding ways to demonstrate that differences in institutional quality lead to differences in economic outcomes.
And their work in this regard was really clever, regardless of whether (and how much) you agree with it:
Acemoglu, Johnson and Robinson examined Europeans’ colonisation of large parts of the globe. One important explanation for the current differences in prosperity is the political and economic systems that the colonisers introduced, or chose to retain, from the sixteenth century onwards. The laureates demonstrated that this led to a reversal of fortune. The places that were, relatively speaking, the richest at their time of colonisation are now among the poorest. In addition, they used mortality figures for the colonisers, among other things, and found a relationship – the higher mortality among the colonisers, the lower today’s GDP per capita. Why is this? The answer is settler mortality – how ‘dangerous’ it was to colonise an area – affected the types of institutions that were established.
The challenge, however, is that not everyone is convinced that AJR proved their case. Many economists agree that the idea—institutions matter—is both intuitive and likely true. But they argue that the empirical work, while impressive, still leaves room for debate. Did AJR really establish causation, or just a correlation? Is the data solid enough to support such sweeping conclusions? These questions linger, and they're important:
...some other economists started pointing out some big flaws. In particular, Glaeser et al. (2004) pointed out that in places where Europeans were able to settle, they didn’t just bring property rights and other institutions — they brought themselves. Glaeser et al. note that it’s impossible to empirically disentangle the growth effect of the institutions from the growth effects of human capital — i.e., the effect of just having a bunch of European-descended people in your country.
Now, that may sound like a racial theory, but it’s not. For one thing, culture might be just as long-lasting4 as institutions themselves. But I think there’s an even more important reason why having European-descended people in your country would cause economic growth — they traded a lot with Europe. Americans and Australians and Canadians got lots of ideas from the UK and Germany and France — technologies, business models, etc. And they established incredibly lucrative trading networks with European countries, often from a place of equality rather than as a subordinate province of empire.
There's a running gag in "The Cartoon Introduction to Microeconomics" that the Nobel Prize in economics often goes to ideas that seem, in retrospect, patently obvious:
Jim Tobin won the 1981 Nobel Prize “for his analysis of financial markets and their relations to expenditure decisions, employment, production and prices.” The jokes about “Congratulations, you win the Nobel Prize” started with a true story recounted as follows in his 2002 NY Times obituary: After he won the Nobel Prize, reporters asked him to explain the portfolio theory. When he tried to do so, one journalist interrupted, ”Oh, no, please explain it in lay language.” So he described the theory of diversification by saying: ”You know, don’t put your eggs in one basket.” Headline writers around the world the next day created some version of ”Economist Wins Nobel for Saying, ‘Don’t Put Eggs in One Basket.’ ”
The idea that institutions matter might feel like one of those obvious truths—a "so what else is new?" moment for many social scientists. And yet, here we are, with AJR receiving the Nobel Prize. Their work is celebrated not because the idea is groundbreaking in its conception, but because of the painstaking effort to quantify it, to show—in data—that institutions make a difference. Their work is also celebrated because it has become a research agenda in its own right, spawning a vast literature that builds on their insights. The Nobel Prize in economics is often awarded not just for an idea, but for giving birth to a research agenda that inspires further exploration and empirical study...
The Econ Nobel is different. Traditionally, it’s given to economists whose ideas are most influential within the economics profession. If a whole bunch of other economists do research that follows up on your research, or which uses theoretical or empirical techniques you pioneered, you get an Econ Nobel. Your theory doesn’t have to be validated, your specific empirical findings can already have been overturned by the time the prize is awarded, but if you were influential, you get the prize.
... and that has certainly been the case here!
Their 2001 paper on colonial influences (Acemoglu, Johnson, & Robinson, 2001) is the most cited paper ever in this area, and Acemoglu alone has an H-index of 175(!!!), underscoring the monumental impact of their work.
Of course, the debates won't end here. There are those who will continue to question the reliability of the data, and therefore the conclusions...
https://twitter.com/Afinetheorem/status/1845857338961396218
and there are others who criticize how AJR's work is interpreted—sometimes as being too kind towards colonialism:
https://twitter.com/devikadutt/status/1845784581888180379
But at the margin, the contribution they made is significant: they brought the importance of institutions to the forefront of economic thought, in a way that resonated beyond academia. More people today understand that good institutions aren't just a footnote in the growth story—they are at the very core of it. And that, in itself, is worth celebrating.
The opportunity cost of celebrating individuals is potentially denigrating institutions, and one should do so at one's peril. For that implication alone, this is a prize worth celebrating.