The Sveriges Riksbank Prize in Economic Sciences in the Memory of Alfred Nobel is arguably the pinnacle of recognition that an economist can achieve in their lifetime. Many noted economists vie for this coveted spot, but few are bestowed the honour. 

At the press conference on 14 October declaring the 2024 winners, Professor Hans Ellegren, Secretary-General of the Royal Swedish Academy of Sciences, stated that the theme of the year’s award was to recognise “studies of how institutions are formed and affect prosperity.” It hardly came as a surprise to hear Dr Ellegren announce the names of Daron Acemoglu, Simon Johnson, and James A Robinson, all giants in the realm of economics whose lives and work revolved around the study of institutions and their impacts on society.

For Daron Acemoglu, it can be mutually agreed that this honour was long overdue. An Institute Professor of Economics at the Massachusetts Institute of Technology, his voluminous works span across the fields of macroeconomics, labour, political economy, development and economic theory.

One of the most cited economists in the world, his 2012 book Why Nations Fail: The Origins of Power, Prosperity and Poverty, co-authored with his Nobel co-laureate James A Robinson, catapulted him to mainstream public acclaim.

Professor Robinson is a University Professor at the Harris School of Public Policy of the University of Chicago. He is renowned for his research at the intersection of economic and political development, with a special focus on the interactions between institutions and political power and how they shape prosperity.

Simon Johnson is the Ronald A Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management. Chief Economist at the International Monetary Fund in 2007-08, he is an outspoken critic of ‘too big to fail’ and his works revolve around the areas of policy and political economy, behavioural sciences, corporate finance, development and public health. 

In 2001, Professors Acemoglu, Johnson and Robinson published a paper titled, ‘The Colonial Origins of Comparative Development: An Empirical Investigation’ using data regarding European mortality rates to understand the impact of the myriad European colonisation policies on the institutions in their societies.

They put forth the argument that differences across European colonial policies and systems are exogenous factors that affect institutions in these societies. They were able to conclude that European societies with high mortality rates are more likely to be heavily influenced by a small, powerful and privileged group of elites, where the institutions are part of an ‘extractive system’. Using these differences in mortality rates, they go on to understand the effects of institutions on differences in income per capita across countries. They estimate that these effects are large and not influenced by outliers, the results displaying robustness across geographic, meteorological, cultural and racial composition controls.

Additionally, they argue that these early institutions have persisted till the present day in these societies. The paper shows that by reducing expropriation risk, which is the risk associated with the government forcibly claiming private property without the willingness and sufficient compensation to the owners, societies would see significant gains in income per capita.

A 2004 paper by the three laureates titled ‘Institutions as the Fundamental Cause of Long-Run Growth’ perused the factors that affect differences in economic development across nations.

They use two “quasi-natural experiments” in history: the division of Korea into two contrasting societies and the colonial expansion by European powers to show that differences in institutions are the driving force behind variations in economic development. Institutions influence the actions of economic actors, based on given incentives and constraints and thus determine outcomes. But since gains from these choices and outcomes vary across actors, there arises a social conflict wherein the victors are usually the elite, i.e. those who have the ability to exert greater political power on the society. 

Why Nations Fail is a seminal work that also pondered on the question of why there existed large disparities between nations; and why some nations were rich and others, were poor.  A culmination of fifteen years of research, Acemoglu and Robinson make a case for why nations, where power is wielded by a small group of elites (i.e. extractive political systems), fail to grow or die out after brief surges in economic expansion. According to them, technology is the harbinger of innovation and with it comes economic prosperity, but this progress comes at the cost of replacing older institutions with newer ones and the revoking of economic privilege and political power enjoyed by a select few in society. Thus, when elites decide to hamper technological progress, societies pay for it with their life. Although there do exist some extractive systems that see economic growth, such as the erstwhile Soviet Union, due to what the authors term as “technological catch-up”, they argue that at one point, the country could find no way to stimulate the growth rate of 6% it had witnessed from the late 1920s to 1960, and eventually collapsed by the year 1991. 

By citing various examples from history and across continents, the book’s fundamental thesis continues to propagate that a nation’s success or failure does not rest on its geography or culture (contrary to popular belief at the time), but its institutions- economic and political, and the interactions between these institutions. By building on earlier research by economists like Douglass North about strong institutions perpetuating a greater level of income in society, the authors show that any nation which sees sustained economic growth can attribute it to the strength of its institutions, for strong institutions incentivise investment and innovation and uphold the rights of the people they serve. Yet, this ideal condition is not representative of the ground reality as the rich are unwilling to let go of the power and influence, they wield over societies.

In 2023, Professors Acemoglu and Johnson published Power and Progress: Our One Thousand Year Struggle over Technology and Prosperity which built on previous arguments by opining that prosperity in the past could not solely be attributed to the “automatic, guaranteed gains of technological progress”.

A very important reason for a rise in economic prosperity in society is because the public and the workforce raised challenges to elite-influenced political institutions to force them to more equitably allocate the benefits from technical innovation. This becomes all the more relevant in the digital age of today, marked by significant breakthroughs in artificial intelligence threatening to permanently alter the fabric of institutions and employment, technology can be a force of empowerment and uplift democracy, if the decision-making capacity no longer rests with the small elite who control it.

Their research and conclusions are vital in understanding the very framework behind the progress of any society. Given the less-than-ideal ethical situation of our world today, it will be long before those running extractive systems relinquish their privileges to maximise the welfare of all members of society. However, the works of this year’s laureates will serve as a signal to the public and moral policymakers that the key to development rests in the hands of the institutions and it is time that these institutions reform before it is too late.