The Royal Swedish Academy of Sciences’ Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (popularly referred as Nobel Prize in Economics) for 2024 will be shared between Daron Acemoglu, Simon Johnson, and James A. Robinson of the US.
Their contribution towards identifying the fundamental role of the economic and political institutions for promoting economic prosperity in a country, as well explaining cross-country economic disparity is cited as the reasons for their selection.
Growth drivers
Theories of economic growth explain economic expansion or rising GDP in a country largely through accumulation of factors of production and improvement in total factor productivity (TFP).
Rise of capital stock supported by higher savings, and employment of more workers are treated as two main forms of raising factors of production. On the other hand, technological changes due to innovations, and improvement of skills of labour through education and training contribute to improvement of TFP. All the above are cited as proximate causes of economic prosperity in an economy.
Technological changes come either due to indigenous innovations such as development of a new technology of production; discovery of a new input/raw material which improves productivity; improvement in the economic environment, or from spillovers from innovations elsewhere through international trade and investment links.
The main contribution of the three Nobel laureates of this year is to move beyond the lessons drawn from theories of growth and identifying the fundamental causes of economic prosperity.
For example, some unravelling was needed to explain what fundamentally contributed to innovations and imparting technological change in the US and other advanced economies which sustained their impressive economic performance.
Why the ‘industrial revolution’ occurred in the Great Britain in the eighteenth century, and not anywhere else? What are the factors contributing to the virtuous circle of growth in the US and many OECD countries, and similar elements protracting vicious circle of poverty in many sub-Saharan economies?
Acemoglu, Johnson and Robinson provided a detailed account of various institutional factors answering the above questions.
Role of institutions
This year’s Nobel laureates had emphasised on putting in place a centralised state which ensures provision of internal and external security, delivery of justice, respect of property right and efficient dispute settlement mechanism as pivotal.
Identification of this factor was not new in terms of economic ideas. Acemoglu, Johnson and Robinson have refined them in the light of underscoring the role of economic, social and political institutions creating a conducive atmosphere for the entrepreneurs and workers to contribute their best towards promoting economic prosperity.
This year’s Nobel laureates explain economic disparity across the countries depending on whether their economic and political institutions are extractive or inclusive.
Extractive institutions allow and promote progress or enrichment of one group or section of the society at the expense of the others.
For example, such institutions support landlords/rich farmers appropriate a predominant share of agricultural output at the expense of tillers/slaves or the industrialists pocket a whale’s share of industrial output without compensating the workers with the just share.
Both the tillers and industrial workers are very critical to the production process. If the reward is not adequate or rather at subsistence, then the motivation for work will be lacking. It will affect the productivity and efficiency, negatively.
Secondly, the extractive institutions disallow entry of others into the production activity of the dominating groups and discourage competition. The dominating groups either in the form of ruling class or economic powers see their interest in continuation of extractive institutions and in turn, the extractive institutions sustain exploitation of the oppressed. Thus, dominance of a group and extractive institutions reinforce each other and prolongs inefficiency.
On the contrary, inclusive institutions provide equal opportunity to all stakeholders in pursuing the economic activity according to their interest and capability. They do not support any entry barriers by the dominant groups, and constantly expose them to competition. Survival of the fittest becomes the rule. Inclusive institutions promote compensation commensurate with contribution.
When one works in an occupation of her own interest, paid in consonance with her productivity and vertical ascendance is possible, naturally there will be adequate motivation for work as also scope to innovate.
Moreover, economic/political empowerment of various sections of the society by removing entry barriers enhances plurality. Inclusive institutions and incentive to economic empowerment reinforce each other, and sustain long term economic progress.
The writer is Professor, Department of Economics, Pondicherry University, Puducherry.