Knowledge nugget of the day: Sveriges Riksbank Prize in Economic Sciences 2024

Subject: Economy

Why in news?

Three US-based economists — Daron Acemoglu, Simon Johnson, and James A Robinson have been awarded Sveriges Riksbank Prize in Economic Sciences 2024, also known as ‘Nobel Prize in Economics’, for studies of how institutions are formed and affect prosperity. The Nobel citation states the three economists “have helped us understand differences in prosperity between nations”.

Key Takeaways :

1. This year’s laureates in the field of economic sciences have provided new insights into why there are such vast differences in prosperity between nations. One important explanation is persistent differences in societal institutions.

2. They have highlighted the significance of societal institutions for a country’s prosperity. The laureates define institutions as the comprehensive set of rules that govern the behavior of individuals within a society or nation. The citation states,  “Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better,”.

Learn through image: With the addition of 2024 laureates Daron Acemoglu, Simon Johnson and James Robinson there have now been 56 prizes in economic sciences awarded to 96 laureates. (X/TheNobelPrize)

3. Daron Acemoglu, Simon Johnson, and James A Robinson have distinguished between inclusive and extractive institutions.

(i) Inclusive institutions: An inclusive institutional framework refers to the existence of democracy, law and order, protection of property rights, etc.

(ii) Extractive institutions: An extractive institutional framework typically refers to a lack of rule of law, of power being concentrated in the hands of a few (autocracy or dictatorship), and the associated risks of expropriation.

4. These two different institutional frameworks lead to contrasting incentives for individuals in an economy or society.

For example, if people are assured that their property will not be taken away at will, or that their incomes and profits will be protected for generations, they tend to focus on boosting long-term growth and prosperity. In the absence of an inclusive institutional framework, the incentives collapse, undermining longer-term prosperity.

5. The laureates examined the European colonisation of large parts of the world, and summarised their findings in a paper titled ‘The Colonial Origins of Comparative Development: An Empirical Investigation’, which was first published in The American Economic Review in 2001.

6. They found that one important explanation for the current differences in prosperity is the political and economic systems that the colonisers introduced, or chose to retain, from the 16th century onward.

7. They found that “in some colonies, the purpose was to exploit the indigenous population and extract natural resources to benefit the colonisers”, while in other cases, “the colonisers built inclusive political and economic systems for the long-term benefit of European settlers”.

8. They also found that the choice of institutions by the colonisers — regardless of who they were — was linked to their mortality.

For example, If the chances of their being killed were high — either because the local population was large in numbers and capable of killing or because the region was home to diseases like malaria — the colonisers chose extractive institutions because they were unwilling to settle down in the colony. If instead the mortality rate was low, they chose inclusive institutions that gave people a say, an ability to build a future, and possibly even a fortune.

BEYOND THE NUGGET: Nobel Prizes 2024

9. Every year, in October, the Nobel Prize is awarded to different categories Medicine, Physics, Chemistry, Literature, Peace, and Economics.

10. Alfred Nobel, a Swedish chemist, engineer, industrialist, and the inventor of dynamite, in his last will in 1895, gave the largest share of his fortune to a series of prizes in Physics, Chemistry, Physiology/Medicine, Literature, and Peace, to be called the “Nobel Prizes”.

11. Formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, the economics prize was established by the Sweden’s central bank in 1968.

12. This year Six prizes were awarded for achievements that have conferred the greatest benefit to humankind. The 12 laureates’ work and discoveries range from proteins’ structures and machine learning to fighting for a world free of nuclear weapons.

Previous Knowledge Nuggets on Nobel Prize 2024: 

Nobel Prize 2024 Peace and Literature

Nobel Prize 2024 Chemistry and Physics

Nobel Prize Medicine

(Source: Why nations fail or succeed: what this year’s Economics Nobel winners worked on)

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