Ambiguities galore in Economics Nobel

The Nobel Economics Prize for 2024 has been given to Turkish economist teaching at the Massachusetts of Technology (MIT) Daron Acemoglu, Englishman Simon Johnson, again from the MIT and American James A Robinson of the University of Chicago. It is unsurprising that all the three laureates are in the United States.

The Nobel for Economics generally goes to economists in the United States, and especially to those at MIT and the University of Chicago, the bastions of the modern conservative and neo-liberal economics. The Nobel Committee’s background to the importance of the work done by Acemoglu and Robinson is quite convoluted.

It tries to integrate questions of economic history and the methods of econometric – mathematical economics – models in the name of empirical evidence. Interestingly, the work of the Economics Nobel is restricted to the modern colonial period, and it is also focused on the experience of the Europeans in their task of colonisation.

It is argued that where the Europeans were able to settle due to the temperate climate as in the United States, Canada, Australia and New Zealand, the settlers improved the economic prosperity levels. And where the European settlers were not able to settle in large numbers because of adverse climatic conditions, the settlers created exploitative conditions to extract as much of the wealth of the countries they colonised.

From this premise they jump to the issue of the importance of political institutions on economic growth. That is, they posit a situation where the elite or a small group is holding the levers of power and also the sources of economic wealth, and they face a mass of people who face exploitation at the hands of the elite.

But the laureates show that the elite is forced to consider the costs of repression because repression can backfire. On the other hand, the masses have to reckon with the costs of revolution because revolution involves a lot of destruction including economic wealth. And through various devices of econometric models, Acemoglu and Robinson come to the conclusion that when the elites accommodate the masses and improve the political institutions which would mean greater democratisation, then economic growth would result.

As economists they are not in a position to assess the impact of colonisation – and yes, they recognise that there are different kinds of colonisation and they seem to identify them quite well in the case of the Europeans – and therefore they narrow down the criterion of colonisation. Their aim is to understand why some countries are more prosperous than others. They understand the stark reality of the gap between the rich and the poor countries.

The Nobel Committee in its background paper notes, “Today, the richest 20 per cent of countries are around 30 times wealthier than the poorest 20 per cent of countries. The income gap across countries have been highly persistent over the past 75 years.” The key decision is in the hands of the elites to improve political institutions, which would stimulate economic growth. “…Acemoglu and Robinson developed a dynamic model in which the ruling elite make strategic decisions about political institutions – particularly whether to extend the electoral franchise in response to periodic threats.”

The platitudinous inference is: “And evidence is mounting in support of the model’s core implications: more inclusive governments promote economic development.” And the Nobel Committee seem to be acutely aware that this is not such a revolutionary insight, and that it remains nebulous in many aspects.

So they say, “While their contributions have not provided a definitive answer to why some countries remain trapped in poverty, their work represents a major leap forward.” An honest admission? Perhaps.