Underwhelming economics Nobel: Winners reveal little we didn't already know

Conclusion of laureates Acemoglu, Johnson, Robinson - that prosperity depends on good (non-extractive) institutions, inclusion, rule of law - seems underwhelming, as these values are self-explanatory

Sometimes, prestigious awards are best left unawarded, especially when the quality of claimants do not live up to certain standards. This year’s Sveriges Riksbank Prize in Economic Sciences, known as the Economics Nobel, was awarded to Daron Acemoglu, Simon Johnson, and James A Robinson, allegedly for advancing our “understanding of the differences in prosperity between nations”.

 

Here are my reasons. One must start with the inherent flaw in how the award is named. The Royal Swedish Academy of Sciences sees the Prize as a recognition of excellence in the “Economic Sciences”. Physics is a science, chemistry is one too, and so is biology. But economics is about human responses to economic incentives and penalties, and its success (or failure) follows from an understanding of psychology and sociology. So economics is not a precise science, and no Nobel winner is a scientist of any kind.

 

Next, given the likely paucity of groundbreaking research — especially as many economic theories, like modern monetary theory, seem to be collapsing under the weight of their own contradictions — the committee seems to find safety in numbers. It awards a bunch of economists and not just one. In the last four years, only once — in 2023 — did the Nobel committee award the Prize to a single recipient (Claudia Goldin, who documented women’s wages and labour market participation rates over centuries). To be fair, research is often a team effort, but we also must note the tendency to award the prize to multiple recipients at the same time.

 

Third, Nobels in economics seem to follow the dominant ideological concerns of the time. In 2021, the Nobel went to three economists for “insights about the labour market” — including the impact of minimum wages on employment — based on natural experiments. This happened around the time when the US was arguing about raising the national minimum wage. In 2022, the Nobel went to three economists who dealt with the role of banks during financial crises. The recipients were Ben Bernanke, the Fed Chairman when the global financial crisis broke in 2008, Douglas Diamond and Philip Dybvig.

 

This year’s prize has gone to Daron Acemoglu, Simon Johnson and James Robinson, two of whom authored a 2012 book, Why Nations Fail. They got the Nobel possibly because inequality and inclusion are watchwords among the elite today. The book’s basic thesis is simple: Good institutions, inclusivity, and the rule of law are essential for economic prosperity. In another work, they looked at institutions created in regions colonised by the West. The Nobel committee sidesteps the issue of colonisation’s actual impact on inequality and notes: “The laureates have shown that one explanation for differences in countries’ prosperity is the societal institutions that were introduced during colonisation. Inclusive institutions were often introduced in countries that were poor when they were colonised, over time resulting in a generally prosperous population. This is an important reason for why former colonies that were once rich are now poor, and vice-versa”.

 

The conclusion of laureates Acemoglu, Johnson, and Robinson — that prosperity depends on good (non-extractive) institutions, inclusion, and the rule of law — seems underwhelming, for these values are self-explanatory. But here are my observations:

 

One, all forms of colonisation are extractive, even if the institutions set up during colonial rule may be of some use after decolonisation. The Nobel authors’ lesser known work, The Colonial Origins of Comparative Development, while not applauding colonialism, indirectly seems to shift the focus away from the negative aspects of settler or non-settler colonialism to types of colonisations. Apparently, there is good and bad colonialism. Niall Ferguson’s Empire: How Britain Made the Modern World is one such work on colonialism that serves as an apologia for colonialism.  

 

Two, culture matters. When so-called modern institutions are used to replace long-existing indigenous institutions, they can cause significant damage. As Meenakshi Jain documents in her book, The British Makeover of India, the early British officials of the East India Company and administrators found the indigenous system of legal redress both inexpensive and quick. Even education, though deficient in the modern sciences, was fairly inclusive and more relevant than the education then being imparted in England in the early 18th century. (This changed much later). But colonial tolerance for indigenous systems grew thin once British power rose to its peak, and there emerged a need to show that colonial education and legal systems were superior to those of the natives. From the infamous Macaulay Minute to the wholesale replacement of indigenous systems with European ones, we saw the emergence of a legal and educational system that created a new class of brainwashed Indian minds with a contempt for local culture.

 

Three, both institutions and the rule of law reflect the consensus among the elites or the existing power structure at a point of time. The issue is not the need for strong institutions or the rule of law, both of which are necessary but not sufficient conditions for prosperity. The issue is how countries can continuously reform institutions and laws to ensure they remain relevant. It can be no one’s case that the American Constitution, as devised in the last quarter of the 18th century, is doing as well today as it did then. Also, the rule of law is in tatters not just in India, but even in Europe, as mass immigration from non-adjacent cultures strains public tolerance. “Left-liberal” governments have opted for “two-tier policing” and differentiated application of the law to accommodate the cultures of Islamic immigrants, to the detriment of local cultural values.

 

Four, the conclusions of Drs Acemoglu, Robinson and Johnson do not explain why there is so much inequality and non-inclusion even within countries subject to the same institutional strengths (or weaknesses) and rule of law. Why do six or seven prosperous states account for the bulk of the wealth generated in the US? Why is Bihar so far behind Haryana, even though both are part of the same Hindi belt? Why do the same set of institutions and laws not bridge this gap?

 

Fifth, there is the unacknowledged starting advantage. We all know that children born into good families and into wealth enjoy advantages over the others, both due to a sound inheritance of genes and material wealth. Why are learning outcomes among the upper classes usually better than those of the less privileged classes? So, is it not equally likely that countries that became rich earlier (by leveraging colonial power, or extracting natural resources) continue to remain rich precisely because of this starting advantage?

 

Sixth, achieving inclusion is always more challenging in multi-ethnic and diverse countries compared to monocultural ones, such as post-Westphalian Europe, the Nordics, Japan, China, Taiwan, and South Korea. The real test of inclusive prosperity for countries in the West lies ahead, as new immigrants rock the cultural boat, cause social tensions, and stretch existing institutions and respect for the rule of law.

 

In short, the three new economics Nobel laureates explain very little that we don’t already know.

 

The author is a senior journalist