The Royal Swedish Academy of Sciences has awarded the Nobel Prize in Economics to three economists. The winners are Turkish-born Daron Acemoglu and British-born Simon Johnson of the Massachusetts Institute of Technology, and British-born James A. Robinson, an economist and political scientist at the University of Chicago. They won the award for their “research on how institutions form and influence prosperity.”
This field has a long and noble history in economics. The Novelists’ contribution is to uncover empirical data on specific economic institutions that promoted or inhibited economic growth, and to investigate the factors that led to those institutions. They point out, as Adam Smith did, that property rights and the rule of law are key. They argue that governments respect these two pillars because political elites share the benefits of economic growth with “the masses” rather than exploiting their wealth.
In their 2012 book “Why States Fail,” Acemoglu and Robinson classify states into two types: extractive and inclusive. In an extractive country, a small elite extracts wealth from the masses, whereas in an inclusive country, political power is shared. When governments are extractive, people have little incentive to produce. But when government is inclusive, the opposite is true: people have property rights and are able to accumulate wealth.
Why do political elites sometimes support property rights and the rule of law and sometimes oppose them? The work of three Nobel Prize-winning authors explores Europe’s colonization of other continents. Masu. They show that there were more colonists in places where diseases such as malaria were relatively rare. These colonists had too many to get rich by exploiting indigenous peoples, so they created wealth-building institutions. However, in areas where settler mortality was high, surviving settlers simply extracted wealth from the natives. This explains why Canada and the United States fared relatively well as colonies, while many countries in Africa and Latin America did not.
As pointed out in My 2013 review In Why Nations Fail, Adam Smith observed that natural resources would be less abundant in the future Canada and the United States than in Latin America. However, the economic institutions that the Spanish government established in Latin America were less oriented toward free markets and property rights than the economic institutions that Britain established in northern North America. It is a shame that Mr. Acemoglu and Mr. Robinson did not mention Mr. Smith’s insight. Nor did he cite economist Mancur Olson’s 1982 book, The Rise and Fall of Nations, which anticipated the Nobelists’ hypothesis.
You might think that Mr. Acemoglu and Mr. Robinson strongly believe in economic freedom. Their research is consistent with the findings of the Fraser Institute’s annual report Economic Freedom around the World, which found a strong positive correlation between economic freedom and real gross domestic product per capita. It turns out that this is true. While both authors do support private property rights, Acemoglu advocates for a high minimum wage adjusted for inflation. He also supports strong antitrust laws.
Behind Acemoglu’s belief in antitrust law is his misinterpretation of the era of the so-called robber lords. In “Why Nations Fail,” Acemoglu and Robinson argue that robber gangs “strengthen monopolies and prevent potential competitors from entering markets or doing business on an equal footing.” “It was intended to do so.” Ironically, they singled out Cornelius Vanderbilt as the infamous robber baron. But as a young man, Vanderbilt helped his employer, Thomas Gibbons, break Aaron Ogden’s monopoly on interstate ferry travel. The Supreme Court issued an antitrust ruling Gibbons v. Ogden (1824). As historian Burton W. Folsom, Jr. pointed out in his 1991 book The Robber Baron Myth, the collapse of the monopoly led to an increase in steamship traffic.
It’s good that the Nobel Prize is given to an economist who understands the importance of private property and the rule of law. Unfortunately, Acemoglu’s understanding is incomplete. He recently signed a statement supporting the Brazilian government’s efforts to curb free speech rights for Brazilians who wish to communicate using X. Time will tell whether Mr. Acemoglu supports further weakening of the rule of law. Let’s hope he isn’t.
Mr. Henderson is a fellow at Stanford University’s Hoover Institution and editor of the Concise Encyclopedia of Economics.
