As good as it gets

In Economics, even a Nobel winning theory has its caveats and exceptions

The work done by this year’s three Nobel Prize winners in Economics—Daron Acemoglu, Simon Johnson and James Robinson—is timely and relevant at a time when there is increasing concern over economic disparities among, and within, nations. The question why some countries do better than others economically has engaged the attention of economists and others for long, and various explanations have been offered. Answers based on geography, climate, work culture, social structures and economic systems have been propounded, but none of them on its own has fully answered the question. The three economists have argued, on the basis of research done on economies across the globe, that the existence and strength of inclusive social institutions are key to a country’s prosperity. They took a historical view of economic growth in many countries and underlined the importance of rule of law, right to property, and institutions that protect them in deciding the pace of growth. 

The three economists have argued that the quality of governance and the absence of exploitation of the strong by the weak are important determinants of growth. They studied the effect of institutions created by colonial powers and found that colonial experience had an impact on long-term prosperity. They differentiated between “extractive” and “inclusive” institutions and found that the former were not conducive to fair growth. The richest countries in 1500 CE became the poorest in modern times. India’s goods production had exceeded that of the American colonies in the 18th century but dwindled later. The economists argued that the greater wealth of the once-rich colonies encouraged the development of methods of extraction, while the higher population provided a labour force that could be coerced to work. Whenever colonial rulers were only interested in extracting resources without investing in social development and ignored inclusive institutions, the colonies became poorer, and they continue to suffer to this day. 

They also compared the situations in South and North Korea and noted that one was democratic and rich, and the other was authoritarian and destitute. The conclusion is that democracy best ensures fair and equitable development, and democratic institutions should be strengthened. They have said that the world cannot depend on the “benevolence of business and tech leaders” and there are challenges like Artificial Intelligence to be reckoned with. While the arguments of the three economists have provided insights into the nature of economic growth, there is a view that they do not explain all historical and contemporary cases and situations of economic growth. America’s development had excluded large segments of the population, and China’s growth in the last four decades happened under an authoritarian government. But in economics and most social sciences, the best theory most of the time has caveats and exceptions.