The Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Sciences to three economists. The recipients are Turkish-born Daron Acemoglu and British-born Simon Johnson, both of the Massachusetts Institute of Technology, and British-born James A. Robinson, an economist and political scientist at the University of Chicago. They received the prize ‘for research into how institutions are formed and influence prosperity.’
This field has a long and noble history in economics. The Nobelists’ contribution is to gather empirical data on the specific economic institutions that have promoted or hindered economic growth, and then to examine the factors that led to these institutions. They point out, like Adam Smith, that property rights and the rule of law are crucial. Governments respect these two pillars, they argue, because political elites share the benefits of economic growth with the “masses” rather than taking the wealth of the masses.
In their 2012 book, “Why Nations Fail,” Messrs. Acemoglu and Robinson divide countries into two types: extractive and inclusive. In extractive countries, a small elite extracts wealth from the masses, while in inclusive countries political power is shared. When governments are extractive, people have little incentive to produce. But the opposite is true when governments are inclusive, because people have property rights and can accumulate wealth.
Why do political elites sometimes support property rights and the rule of law, and sometimes oppose them? The research of the three Nobelists examines the European colonization of other continents. They show that where there was a relative absence of diseases, such as malaria, there were more settlers. These settlers were too numerous to get rich by exploiting the natives, so they created wealth-building institutions. But where settler mortality was high, those settlers who survived simply extracted wealth from the natives. This explains why Canada and the US did relatively well as colonies and many countries in Africa and Latin America did poorly.
As I noted in my review from 2013 from ‘Why Nations Fail’, Adam Smith noted that the future Canada and the US would have fewer natural resources than Latin America. But the economic institutions that the Spanish government had established in Latin America were less focused on free markets and property rights than those that the British had established in the northern part of North America. It is a pity that Mr Acemoglu and Mr Robinson did not mention Smith’s insight. They also did not cite economist Mancur Olson’s 1982 book, “The Rise and Decline of Nations,” which anticipated the Nobelists’ hypothesis.
You might think that Messrs. Acemoglu and Robinson believe strongly in economic freedom. Their work is consistent with findings in the Fraser Institute’s annual Economic Freedom of the World report, which finds a strong positive correlation between economic freedom and real gross domestic product per capita. Although the two authors support private property rights, Mr. Acemoglu advocates a high minimum wage that is adjusted for inflation. He also supports strong antitrust laws.
Behind Mr. Acemoglu’s faith in antitrust lies his misinterpretation of the era of so-called robber barons. In “Why Nations Fail,” Messrs. Acemoglu and Robinson argue that the robber barons “aimed to consolidate monopolies and prevent potential competitors from entering the market or doing business on an equal footing.” Ironically, they choose Cornelius Vanderbilt as a notorious robber baron. But as a young man, Vanderbilt helped his employer, Thomas Gibbons, break Aaron Ogden’s interstate monopoly on ferry travel. The Supreme Court ruled against the monopoly Gibbons vs. Ogden (1824). As historian Burton W. Folsom Jr. noted in his 1991 book, “The Myth of the Robber Barons,” the collapse of the monopoly fueled an increase in steamboat traffic.
It is good that a Nobel Prize is awarded to economists who understand the importance of private property and the rule of law. Unfortunately, Mr. Acemoglu’s understanding is incomplete. He recently signed a statement supporting the Brazilian government’s initiative to restrict freedom of expression for Brazilians who wish to communicate via X. Only time will tell whether Mr. Acemoglu will be in favor of further undermining the rule of law. Let’s hope he doesn’t.
Mr. Henderson is a research fellow at the Hoover Institution of Stanford University and editor of the Concise Encyclopedia of Economics.