Edward Lotterman The Royal Swedish Academy of Sciences last week awarded the “Central Bank of Sweden’s Prize in Economic Sciences in Memory of Alfred Nobel” to professors Daron Acemoglu, Simon Johnson and James A. Robinson “for studies of how institutions are formed and affect prosperity.” The first two work at the Massachusetts Institute of Technology while Robinson is at the University of Chicago — although notably in the Harris School of Public Policy, not the vaunted Department of Economics. To decode the Nobel citation, the professors’ research centered on why some nations are richer than others, and why some economies are more efficient or fair at turning raw resources into goods and services to meet people’s needs; these are some of the most fundamental issues societies face. The work is a valuable, albeit small, contribution to understanding the issue of economic inequities and what influences them. Yet on reading that the Nobels this year honored findings that differing institutions cause some nations to grow and prosper faster than others, people who’ve studied history, or simply lived abroad, probably muttered, “I could have told you that!” One wag even noted: “Three economists just got the Nobel Prize for explaining how institutions affect economic performance of nations. Earlier, the Nobel in Physics was awarded to scholars who explained why the sun rises in the east and why sewage flows downhill.” In other words, the links between national institutions and economic performance seem obvious to many and have for a long time. Consider the title of Adam Smith’s 1776 opus, “An Inquiry into the Nature and Causes of the Wealth of Nations,” which marked economics’ emergence as an independent discipline from philosophy. This alone would be an accurate description of these three scholar’s work. The questions of why some countries are richer than others, why some people live in comfort while others struggle, remains as vital today as it did 248 years ago. So while the problem is old, the issue remains vital. And so the solutions must be elusive. Consider first what is meant by the term “institutions.” This does not mean specific entities like MIT, the University of Chicago or the Minneapolis Grain Exchange. Rather, it is used in the broader sense, as in “the institution of marriage” — a social construct that also happens to be legally, economically and culturally binding. Market economies are “institutions” in this regard as are private property rights, educational opportunities, health care and transportation systems, civil and criminal law, courts and myriad other combinations of rules and organizations that govern public life and economic interactions between people. The role of institutions or issues raised by them are evident in the laureates themselves. None of the three are native-born U.S. citizens, but all are doing their most important work at U.S. universities. Johnson has a bachelor’s degree from Oxford and Robinson a doctorate from Yale, both venerable institutions. But all three have at least one degree from smaller regional British universities, two of them “red brick” ones — established by government because the world-famous institutions of Cambridge and Oxford failed to meet the needs of Britain as a whole. Two of them work closely because they were students together at the London School of Economics, an institution established by 19th century socialists, including playwright George Bernard Shaw. Believe it or not, MIT, where Johnson got his doctorate and where he teaches with Acemoglu, is an institution that got its start as a state school set up under the Morrill Land Grant Act to establish colleges to teach agricultural and mechanical arts. Yet it had to fight off takeover attempts by Harvard for decades. The University of Chicago was established at the will and with the treasure of John D. Rockefeller, more modest than Buck Duke, Andrew Carnegie, two Mellon brothers, Andrew and Richard, Cornelius Vanderbilt and Leland Stanford, all of whom also funded what are now major research universities. What does this have to do with the Nobel awards and the research that led to them? Well, much of the prosperity our nation takes for granted depends on our attractiveness to smart, energetic people from other nations. We welcome them here. We have diverse funding for universities that do world-class research. This gets transformed into beneficial technologies via well-defined intellectual property rights backstopped by a legal system that is efficient compared to those of other nations. Contrast all this with Peru. It had a far more complex government and more awe-inspiring civil engineering skills than any group in North America at the time Europeans arrived in the Western Hemisphere. A university operated in Lima 93 years before Harvard. Another at 9,000 feet altitude at Ayacucho was teaching 24 years before Yale opened. Yet neither made any great contribution to that country’s economic growth or to world knowledge. The country remains poor and unjust relative to the resources available. There were great centers of learning elsewhere, including Africa and Asia as well as Europe, before the United States began. But no other nation has succeeded in combining ideas and money from so many different sources – churches, colonial government, rich families, state and local governments — to create institutions of research and education that fostered economic growth and social progress as we did. Moreover, crucial decisions made in the mid-1800s ensured that, for more than a century at least, American universities functioned to reduce social inequalities and to broaden opportunities for many despite income differences. This all is a micro-case study of what the latest Nobels deal with. Specifically, using contemporary statistical and modeling techniques, the three researchers examined existing differences in varying countries depending on the circumstances in which they had been colonized by European powers. They found that when areas conquered by European military forces had large intact populations and resources, like gold, silver, coffee, sugar or cotton, that could be extracted and shipped back to the home countries, there was little settlement of Europeans. Repressive plantation and mine owners enslaved indigenous peoples or brought slaves from Africa to labor at producing export goods. Very little, if any, of this loot went to benefit the host nation. And many of these nations struggle to this day. In contrast, where native populations were less dense — which in North America was due to epidemics of European origin killing large majorities across the continent — and where there were fewer high-value extractable products, also North America, there was far greater European settlement of seized lands. When settlers came from countries that already had robust modernizing political and economic institutions, the new settlers quickly developed self-governing colonies producing goods and services largely for their own consumption, not for export or the indigenous people. Native populations in North America, Australia and New Zealand were slaughtered; modern European economies emerged. This generally did not happen in tropical countries in South America, Africa or Asia. However, Argentina and Uruguay to the south of the tropics were closer to the North American model than the Andean countries or tropical Brazil, Venezuela and Central America. Much more could be said, including some criticism. I don’t accept the Nobel winners’ distinction between “culture” and “institutions,” nor their belief that the first does not play a role in economic growth but the second does. Culture and institutions are intertwined and inseparable. Their work also does not entirely explain the long-standing internal national differences between, say, Minnesota and Alabama; or the intra-continental differences between Catholic-Protestant heritage nations the Netherlands and Switzerland with Eastern Orthodox-centered countries like Bulgaria or Moldova. Their work explains, but offers few prescriptions for change. But it still is useful work in that it draws attention to endlessly frustrating but vitally important situations in the world we all share. Interested readers should go to the Nobel website. Its eight-page “popular science background” and 57-page “scientific background” documents are excellent.Related Articles Business | Real World Economics: Wanted: Political cover for the inevitable Business | Real World Economics: Port strike suspended, issues remain Business | Real World Economics: What’s all this I hear about tariffs? Business | Real World Economics: Regulations challenge some basic principles Business | Real World Economics: Reports of democracy’s death are greatly exaggerated St. Paul economist and writer Edward Lotterman can be reached at [email protected].