Dear All:

Well, who won?

The Nobel Prize for Economic Sciences for 2024 was announced today, October 14, 2024. It went to Daron Acemoglu, Simon Johnson, and James Robinson.    

Acemoglu is 57 years old and was born in Instanbul, Turkey.  He obtained his  B.A. in economics from York University and his Master’s and Ph.D. in economics from the London School of Economics.  His Nobel-winning work was done while a professor at MIT.  He is currently an Institute Professor at MIT.

Johnson is around 61 years old and was born in Sheffield, England.  He obtained his  B.A. from Oxford University and his Ph.D. in economics from MIT.  His Nobel-winning work was done while a professor at MIT.  He is currently the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management.

Robinson is around 64 years old and was born in Great Britain.  He obtained his  B.A. in economics from the London School of Economics and his Ph.D. from Yale University.  His Nobel-winning work was done while a professor at UC Berkeley.  He is currently the Reverend Dr. Richard L. Pearson Professor of Global Conflict Studies at the University of Chicago. 

The prize was given “for studies of how institutions are formed and affect prosperity””.

So what did they do to make them so Noble?

A well-known CEO of a major bank once told me that dictators are bad, unless I’m the dictator.  Establishing a dictator is one way to structure a political system.  Tell the people to work, tax them, and live off their hard work.  Of course, you need a strong force to keep them working.  Communism is another way to structure a political system.  A system where we all work, we all own everything, and we all receive the same compensation.  The dictatorship form of government uses “punishment” or “fear” as its control mechanism.  Communism uses coercion (George Orwell reminded us of that) and “brotherhood” as its control mechanism.  Another type of political system might encourage property rights and incentives for the people to work.  We might call this type of system a democracy, but there are all types of so-called democracies, so let’s call it a market based incentive system.  An interesting question is what type of system will lead to higher prosperity or higher growth?

The issue has been studied by many researchers.  It is also quite evident from our casual understanding of the history of the world that societies that offer incentives and the ability to create and produce will probably be more effective than pure dictatorships or communist regimes.  This idea of incentives and the ability to create and own one’s product is important not only at the micro level of individual people but at the macro level as shown by numerous researchers.

Acemoglu, Johnson, and Robinson wrote a series of articles where they attempted to understand how the form of political system (aka institutions) affected the prosperity and growth of nations and how the political system might change over time.

In one of their research projects they studied European colonization and showed that where colonizers set up property rights and incentives to do commerce, these relatively poorer areas ended up becoming more prosperous over the next 500 years and areas where settlers cared little about incentives and simply extracted the land’s riches did much worse.   One way to make sense of this is that when the industrial revolution came along (circa 1764-1860) the areas with incentives and property rights had the market system to naturally take advantage of these high growth opportunities.

In other research projects, they attempted to model the incentives for a government to be more democratic versus less democratic.  That is, when would governments decide to be more totalitarian and more democratic?  Their model is complicated, but relates to our common sense.  When the cost of revolution is very high, governments are likely to extend the franchise or become more democratic.  Thus, the Nobel recipients believe that the expansion of the suffrage (allowing more people to vote) in England and other areas was a rational reaction of the elite that feared a potential revolution.  The authors also studied how potential credibility of the government plays a factor in the democratization of a society.

In summary, although many scholars and even non-scholars have believed that institutional structure and property rights play an important role in the success of households, businesses, and nations, these scholars added more substance to that notion in a series of research papers.  

So what about the Nobel choice?

I was a graduate student at MIT when Daron Acemoglu was hired as an Assistant Professor.  He was always a nice guy and always fun to chat with.  He was known to many people to be an absolute work horse.  He worked hard, published a lot, and then made a leap into this area of institutions or political systems.  

I asked Simon Johnson about his greatest pleasure while working on these projects and he replied:  “The greatest pleasure is when other people pick up on our ideas and build their own creative research. It has been and continues to be a privilege to have so many great colleagues around the world – all pursuing important questions.”

Although I do not predict who will win the Nobel prize anymore, I did suggest it would in the field of political economics and it was.

So is that it?

Despite the progress with growth theory, there are still lots of unanswered questions, although many great economists have worked on understanding how growth works.  Nobel prize winner, Robert Lucas once said “Once you start thinking about economic growth, it’s hard to think about anything else.”  And the reason for that, is that economic growth makes all of us richer.  If done correctly, it’s a win-win (Pareto improvement).  

In today’s Western world, there has been a sneaking trend towards less incentives and more control of the populace. There has also been a change in the nature of the workforce after the Corona Crisis of 2020.  It seems as though workers are revolting in a new way, by working less.  It’s not clear what is going on.  It could be that workers feel their real wages have declined and they are auto-correcting by working less.  It also could be something else.   

The research by these Nobel laureates probably would ask us to understand these institutional systems and incentives and attempt to remedy them.

For more information on the winners:

https://www.nobelprize.org/uploads/2024/10/popular-economicsciencesprize2024.pdf

From MIT:  https://news.mit.edu/2024/mit-economists-daron-acemoglu-simon-johnson-nobel-prize-economics-1014#:~:text=MIT%20economists%20Daron%20Acemoglu%20and%20Simon%20Johnson%20PhD%20’89%2C%20whose,in%20Memory%20of%20Alfred%20Nobel

From Chicago:  https://news.uchicago.edu/story/james-robinson-shares-nobel-prize-research-global-inequality 

Congratulations to Acemoglu, Johnson, and Robinson for their fruitful pursuit of knowledge, and the other armies of researchers who walked with them!

Happy Columbus Day!

Ludwig

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October 14, 2024