How Institutions Shape Wealth: Lessons from the 2024 Nobel Prize Winners in Economics

How do institutions shape prosperity? This year’s Nobel Prize in Economics, awarded to Daron Acemoglu, Simon Johnson, and James A. Robinson, addresses this critical question with a fascinating take on colonial history and its long-lasting impact on global wealth distribution.

These three economists have uncovered why some former colonies are wealthy today, while others struggle with poverty. They found that the type of institutions introduced during colonial rule is key: were they inclusive, designed to support long-term development, or extractive, focused on short-term gains for the colonisers?

In places like the United States and Australia, European settlers created political and economic systems that aimed to benefit their future generations. Over time, these "inclusive" institutions set the groundwork for stability, development, and ultimately, wealth. But in regions where the goal was to exploit the local population and resources, colonial authorities set up "extractive" institutions that continue to hinder growth even today. These extractive institutions favored the few in power, creating a cycle that made it nearly impossible for economic reforms to take root, leaving countries stuck in low-growth traps.

This research is groundbreaking for those seeking to understand the persistent wealth gap between nations. Jakob Svensson, chair of the Nobel prize committee, emphasized this, stating that bridging income inequalities worldwide is one of today’s biggest challenges. By shining a light on the pivotal role of institutions, these economists argue that sustainable prosperity depends on establishing inclusive systems that benefit everyone in society, not just the few at the top.

But their insights don’t stop at historical institutions. Acemoglu, one of the laureates, has also raised questions about the current hype surrounding artificial intelligence (AI). He warns that massive investments in AI, without careful consideration, may not bring the promised economic benefits, especially if it fails to create substantial job opportunities. This caution echoes the economists' findings on institutions: policies and systems must be designed for widespread benefit to truly foster growth.

In understanding the roots of wealth and poverty, these Nobel-winning economists provide valuable lessons for both the past and future. Their work challenges us to rethink how societies are structured and who truly benefits. For aspiring economists, this year’s Nobel Prize offers a fresh perspective on how historical legacies and policy choices intersect to shape the world’s economies.

Glossary of Key Economic Terms

• Colonial Rule: The control or governance of a country or region by a foreign power.
• Democratisation: The transition to a more democratic political system, often featuring increased public participation and rights.
• Economic Reforms: Changes made to improve the economic systems of a country, which may include policies, institutions, and regulatory frameworks.
• Extractive Institutions: Systems or policies focused on short-term exploitation of resources and labour, often benefiting only a small group.
• Inclusive Institutions: Systems designed to promote fair economic and political opportunities for all members of society, supporting sustainable growth.
• Institutions: Established laws, practices, or customs in a society that guide political, economic, and social interactions.
• Low-Growth Traps: Situations where a country remains in a cycle of low economic growth, often due to poor institutional or policy structures.
• Nobel Prize in Economics: Formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, awarded to economists for outstanding contributions to the field.

Retrieval Questions

1. Who were the 2024 Nobel laureates in Economics, and what was their main research focus?
2. What are inclusive and extractive institutions, and how do they impact a country’s long-term prosperity?
3. Why do the economists believe some former colonies are now wealthier than others?
4. How does Daron Acemoglu’s perspective on AI relate to his research on economic institutions?
5. Why is addressing global income inequality considered one of today’s major challenges by the Nobel committee?

This Nobel Prize-winning research encourages us to think critically about how historical events and policies continue to shape our world today, providing a framework for building a more equitable global economy.