Although most people are not interested in the details of pure economic research, the discoveries can affect the daily lives of virtually everyone by shaping public policy or even the way we think about the world. This year’s Nobel Memorial Prize in Economics has been awarded (long overdue) to three researchers “for studies of how institutions are formed and affect prosperity.” The winners (Daron Acemoglu, Simon Johnson, and James A. Robinson) are all affiliated with U.S. universities (MIT and the University of Chicago).
Each year, the Royal Swedish Academy of Sciences awards the Prize (formally the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) in recognition of ideas and research that increase our understanding of important issues in economics and related areas. This year, the emphasis is on how societal institutions affect the rate of economic growth, productivity, and incomes. Simply stated, why are some countries rich while others are poor?
The institutions that are relevant in this context are the legal, political, banking, and other systems necessary for the smooth functioning of a society. Their structure and strength have much to do with how prosperous countries have become. If the institutions established during early colonial development embraced fundamental economic freedoms and opportunity and the rule of law needed to sustain them, long-term economic growth was likely. If, conversely, the institutions tended to exploit the population and resources available to the benefit of a small group, ultimate prosperity was elusive.
These pioneering researchers also examined other factors, such as population density and health challenges. Areas where diseases made it difficult for European colonizers to survive (for example, those regions near the equator) tend to have dysfunctional economies and high poverty rates.
Once established, economic and political systems prove rigid. If there are ruling elites, for example, they are reluctant to relinquish power in order to enable a more democratic system. In Great Britain and Sweden voting power was only granted to the general population following rioting or other disruptions.
The stability of U.S. institutions goes far in explaining the high level of growth and prosperity which has been achieved. Property rights are secure, investments are protected, education and health care are available for many, and upward mobility remains possible. Though not perfect, these factors support greater opportunities than are available in many other parts of the world.
Nonetheless, as our relatively young nation evolves and we look forward, we would do well to foster greater opportunities and freedoms and to eschew the limits on voting rights and individual liberties that have gained traction of late. A culture of strong institutions and increasing opportunities has brought us this far, and enhancing them is essential for ongoing advancement. Stay safe!
