A Nobel prize for explaining why there's global inequality

Summary

Planet Money: A Nobel Prize for Explaining Global Inequality

Episode Title: A Nobel Prize for Explaining Why There's Global Inequality
Host/Author: NPR's Planet Money
Release Date: December 14, 2024

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Introduction

In this compelling episode of Planet Money, NPR delves into the groundbreaking work of three economists—James Robinson, Daron Acemoglu, and Simon Johnson—who have revolutionized our understanding of global inequality. Their research elucidates how institutions play a pivotal role in determining a nation's economic destiny, a theory so influential that it earned them the Nobel Prize in Economics.

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The Nobel Prize and Its Winners

James Robinson (02:54) from the University of Chicago, Daron Acemoglu (03:08) of MIT, and Simon Johnson join the conversation to discuss their award-winning insights. Their collective work has shed light on why some countries thrive while others languish, moving beyond traditional explanations like technology, education, or natural resources.

James Robinson (02:55): "Don't tempt me."

The trio's camaraderie is evident as they reminisce about their Nobel Prize win, sharing personal anecdotes that highlight their collaborative spirit.

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The Origin of Their Collaboration

The story begins in the early 2000s when Robinson and Acemoglu, both PhD students, met under less-than-ideal circumstances. At a seminar at the London School of Economics, Acemoglu’s persistent questioning annoyed Robinson, yet this "meet cute" (07:03) sparked a profound professional friendship.

James Robinson (07:43): "Have you read this paper by Northern Weinghast?"

Their immediate connection over shared interests in institutions marked the beginning of a partnership that would challenge and expand economic thought.

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The Research Breakthrough: Institutions and Colonialism

The economists sought to answer a fundamental question: Why are some countries rich and others poor? Traditional economic models largely ignored the role of institutions—defined as the systems, rules, and structures that shape society (08:27).

James Robinson (13:24): "The historical mortality environment for Europeans enormously influenced whether or not these places became settler colonies."

Their breakthrough came from studying the impacts of European colonization. They discovered that the type of institutions established during colonization had long-lasting effects on economic outcomes. Settler colonies like the United States and Canada, where Europeans established democratic and inclusive institutions, tended to prosper. In contrast, extractive institutions in regions like the Congo focused on exploiting indigenous populations, leading to persistent poverty.

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Their Theories on Institutions: Inclusive vs. Extractive

In their influential book, "Why Nations Fail" (24:02), Robinson and Acemoglu categorize institutions into two types:

1. Inclusive Institutions:

   • Characteristics: Serve a broad segment of society, encourage innovation, protect property rights, and support democratic governance.
   • Examples: Patent systems (25:02), public education (25:18), and antitrust laws (25:30).

2. Extractive Institutions:

   • Characteristics: Concentrate power and wealth in the hands of a few, hinder innovation, and exploit the majority.
   • Impact: Lead to lower economic growth and persistent inequality.

James Robinson (25:42): "We find very robust evidence that democracy is associated with better provision of public goods, better investment in education, in infrastructure, higher economic growth."

They argue that the quality of institutions is the "X factor" determining a nation's economic success or failure, overshadowing other factors like geography or culture.

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Impact and Reception

Their research gained significant attention when presented at a Stanford conference in 2000 (19:55). While initially met with skepticism, the clarity and robustness of their statistical analyses won over many economists.

Daron Acemoglu (19:16): "Looking at his tables, just the differences, you know, when you see these mortality rate differences between different colonies, it was just mind-blowing."

Their work provided a natural experiment by linking colonial mortality rates to current economic performance, illustrating how historical events can have centuries-long impacts.

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Continuing Debates and Criticisms

Despite their acclaim, Robinson, Acemoglu, and Johnson acknowledge that their theory is not without challenges. Critics point to cases like India and China, where economic trajectories don’t neatly align with their institutional theories.

James Robinson (27:06): "The transition towards economic growth in China starting in the late 1970s is clearly driven by this move to much more inclusive economic institutions."

They address these criticisms by emphasizing the complexity of social systems and the multifaceted nature of institutions. For instance, while India is a democracy, its caste-based system impedes social mobility, presenting a nuanced picture of inclusive institutions (27:15).

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Conclusion: The Significance of Their Work

Robinson, Acemoglu, and Johnson's research underscores the power of institutions in shaping economic outcomes. By providing a framework that links historical institutional choices to present-day prosperity, they offer a hopeful perspective: nations can foster better economies by improving their institutions.

James Robinson (29:49): "We can build a fairer society and a better economy through the hard work of improving our institutions."

Their work not only advanced economic theory but also empowered policymakers and citizens with a deeper understanding of how to cultivate inclusive institutions for sustained economic growth.

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Key Takeaways

• Institutions are Crucial: The quality of a nation's institutions is a primary determinant of its economic success or failure.

• Colonial Legacy Matters: The type of institutions established during colonization has long-lasting effects on a country's economic trajectory.

• Inclusive vs. Extractive Institutions: Inclusive institutions promote broad-based prosperity, while extractive ones concentrate wealth and hinder growth.

• Historical Context is Vital: Understanding the historical context of institutional development is essential for addressing current economic challenges.

• Ongoing Debate: While their theory is influential, it continues to evolve as new evidence and critiques emerge.

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Notable Quotes with Timestamps

• James Robinson (02:55): "Don't tempt me."

• James Robinson (07:43): "Have you read this paper by Northern Weinghast?"

• James Robinson (13:24): "The historical mortality environment for Europeans enormously influenced whether or not these places became settler colonies."

• James Robinson (25:42): "We find very robust evidence that democracy is associated with better provision of public goods, better investment in education, in infrastructure, higher economic growth."

• Daron Acemoglu (19:16): "Looking at his tables, just the differences, you know, when you see these mortality rate differences between different colonies, it was just mind-blowing."

• James Robinson (27:15): "This caste-based system was very, very strong upon independence."

• James Robinson (29:49): "We can build a fairer society and a better economy through the hard work of improving our institutions."

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This episode of Planet Money masterfully unpacks the intricate relationship between institutions and economic outcomes, providing listeners with a nuanced understanding of global inequality. Through engaging storytelling and insightful analysis, it highlights how thoughtful institutional design can pave the way for a more equitable and prosperous world.

Transcript

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[Erica Barris]

Hey, it's Erica Barris. A quick word before the show to talk about this year and all the different kinds of stories you heard on Planet Money. This year we brought you stories about inflation, disinflation, stagflation, skinflation, dynamic pricing, what is Temu, banking apps, rum, taxes, the main potato war of 1976. So many stories about so many different things. Semiconductors. And the one thing they all have in common, AI trade fraud, is we work really hard on each of them, international shipping so that they make you smarter. And they're fun to listen to. Tiny soda cans, zombie mortgages, why Flying sucks, and another edition of Plan Planet Money Summer School. So this is the time of year when we say, hey, if that stuff was useful to you, if you made us a part of your day in the car, on the train while you were doing dishes, chip in and help keep us going, your support matters so much that NPR basically invented an entire new product that we will give you to incentivize your donation. We're talking about NPR Plus. Maybe you're already a PLUS supporter. If so, thank you. If you're not and you sign up today, you get perks for more than 25 different NPR podcasts, sponsor free listening to all of them and bonus content for some of our biggest shows, including this one, and exclusive access to special Planet Money merch in the NPR shop. You get all that as a thank you for investing in NPR and our work at Planet Money. So go to plus.NPR.org to sign up. Plus.NPR.org that link is in our episode notes. And thank you. This is planet money from NPR.

[Jeff Guo]

Back in the day, like 30 years ago, if you asked economists, how did some countries end up so rich and other countries end up so poor? You know, in the grand scheme of things, a lot of them might have told you a story about technology or education or natural resources or even climate patterns.

[Greg Rosalski]

But in the early 2000s, there were these three economists who pointed out something was missing from that picture, something massive that a lot of people in their field were overlooking. Their research. It triggered a revolution in economics. And this year, those three economists, they won the Nobel Prize. We recently met up with one of them on Zoom.

[James Robinson]

Hello.

[Greg Rosalski]

Hello.

[James Robinson]

Yes, this is James Robinson here.

[Greg Rosalski]

Wow. Punctuality Sir, I feel like winning a Nobel Prize. You wouldn't have to show up on time anymore.

[James Robinson]

Don't tempt me.

[Daron Acemoglu]

Yeah.

[Jeff Guo]

James Robinson is an economist at the University of Chicago. This year, he shared the Nobel Prize with his colleagues Simon Johnson and Duran Acemoglu of mit.

[Greg Rosalski]

Now, it's one thing to win a Nobel Prize, it's another to win it with your friends.

[Jeff Guo]

What's the first thing you said to Doron after you found out?

[James Robinson]

I sent him a smiley face. Actually, I think an emoji.

[Greg Rosalski]

Of course, being hard hitting journalists, we had to verify this fact with Doron himself. So we called him up.

[Daron Acemoglu]

Hey, Greg, how you doing?

[Greg Rosalski]

Good, Daron. Well, you know, we talked a few weeks ago and I wasn't nervous, but somehow I'm nervous now with a man of. You.

[Daron Acemoglu]

I don't believe you.

[Greg Rosalski]

With a man.

[Daron Acemoglu]

You're a pro. I should be the one who's nervous. I'm going to get skewered here.

[Jeff Guo]

One of our very first questions.

[Greg Rosalski]

So James Robinson told us that he did send you a smiley face emoji.

[Daron Acemoglu]

Yes, he did.

[Greg Rosalski]

Which is wonderful.

[Jeff Guo]

It has been a whirlwind couple of months for James and Duran and Simon. Giving lectures, signing autographs, sending emojis to people, all culminating in this week when they put on their white ties and tail coats and attended the official Nobel Prize award ceremony in Sweden. Now, please step forward and accept the prize from His Majesty the King.

[Greg Rosalski]

This trio of economists won the prize for a monumental insight, one that helped economists understand this kind of mysterious X factor that can determine the success or failure of a nation's economy. Hello and welcome to Planet Money. I'm Greg Rosalski.

[Jeff Guo]

And I'm Jeff Guo. This mysterious X factor has been one of the hottest topics in economics over the last couple institutions. They're at the center of a powerful and almost radically obvious that the economic fate of nations is determined by how how societies organize themselves.

[Greg Rosalski]

Today on the show, we're chatting with James and Duran about why some countries are rich and others are poor, why it took so long for economics to recognize the power of institutions. And what the heck is an institution anyway?

[Simon Johnson]

Support for this podcast and the following message come from Stripe helping many of the world's most influential businesses grow their revenue and build profits. Whether it's Hertz making checkout a smooth ride for their customers, OpenAI answering unprecedented demand, or PGA chipping away at back office inefficiency, Stripe's financial infrastructure platform helps companies achieve ambitious goals. No matter what success looks like for your business, Stripe Helps ensure complex financial systems don't get in your way. Learn [e-mail] this message comes from Capital One. Say hello to stress free subscription management. Easily track, block or cancel recurring charges right from the Capital One mobile app. Simple as that. Learn [e-mail] Subscriptions Terms and Conditions apply.

[Greg Rosalski]

For this year's winners. The path to the Nobel Prize in economics started back in 1992. The Cold War has just ended. The number two song on the charts is Baby Got Back. And James Robinson is just finishing up his PhD.

[Jeff Guo]

Now, when you're a young economist, you spend a lot of time visiting different universities, presenting your research at seminars to your fellow economists. And at one of these seminars at the London School of Economics, James encounters this young guy sitting in the front row.

[James Robinson]

You know, every slide I put up, you know he objected to something. Oh, look, assumption two, no, if you change that, that result wouldn't follow.

[Jeff Guo]

And who is that guy?

[James Robinson]

Yeah, exactly. Who's this really irritating guy?

[Greg Rosalski]

That really irritating guy? That was Daran Acemoglu, who at the time was also a PhD student. We asked him to paint a picture of that first time he met James.

[Daron Acemoglu]

Oh, I don't know, you have to ask him. He might say I was asking too many questions or something.

[Greg Rosalski]

That's exactly what he said.

[Daron Acemoglu]

Did he say that?

[James Robinson]

Oh, no.

[Greg Rosalski]

He used the word irritating.

[Daron Acemoglu]

Oh, no, no, he didn't say that, did he?

[Greg Rosalski]

He did.

[Jeff Guo]

Okay, okay. You know, I know. We all know, I think where this is going. According to the law of the rom com, meet cute James and Daron are about to become best friends.

[James Robinson]

Then the seminar ends and the chairman kind of introduces me. Oh, this is Daron. I said, moblu, you know he's going to come to dinner. I was like, oh, seriously? Now they have to bring the guy to dinner.

[Greg Rosalski]

But as they all walk out together down the narrow streets of London, James and Daron start to chat. And with just a few words, Duran gets James economist heart to flutter.

[James Robinson]

He looks at me and he says, have you read this paper by Northern Weinghast? And I had read the paper. And then what do you think about it?

[Greg Rosalski]

Northern Winegast, of course. This was kind of a nerdy history paper looking at 17th century England, specifically how its economy was supercharged by changes to its institutions.

[Jeff Guo]

Institutions, they're like the systems, rules and structures that shape society. So an example would be like the court system or public schools. The Federal Reserve is an institution. So is our entire system of representative democracy. But there are also horrible institutions like slavery or dictatorship.

[Greg Rosalski]

And at their very first meeting, James and Doron are already bonding over their shared fascination with institutions. For both of them, this was personal. Dharan, for instance, grew up in Turkey during a turbulent time for its institutions.

[Daron Acemoglu]

In 1980, as I was in middle school, just the beginning of my seventh grade, Turkey suffered a big military coup. There were soldiers everywhere, including in our school. So Turkey was definitely not a democratic country at the time, and it was also suffering via a series of economic problems. So I got interested in exactly these sets of issues.

[Greg Rosalski]

Meanwhile, James spent much of his youth in developing countries. His dad worked as an engineer in places like Barbados and Trinidad and Tobago, places that were grappling with their colonial history.

[James Robinson]

You know, I grew up in the colonial world. It's not like rocket science. You know, you might think, in retrospect, to think that colonialism might have had something to do with the relative poverty of the Caribbean. Okay. But no one talked about that in economics. Like, zero discussion.

[Jeff Guo]

Yeah. At the time, the idea of institutions and their influence on wealth or poverty hadn't made it into the mainstream models that economists were working with.

[James Robinson]

It was amazing how sort of fringe a lot of these ideas were, basically because it's just not presented in the way that mainstream economists do research.

[Greg Rosalski]

Right. Modern mainstream economics, it's kind of obsessed with math and data and proving things with statistics. Which is why a lot of economics research focuses on small, precisely quantifiable. Quantifiable questions like, I don't know, how do grain prices change with the weather?

[Jeff Guo]

But questions about institutions, those questions are much harder to quantify. How could you ever prove that, you know, the difference between Haiti's and Sweden's economies comes down to secure property rights or the quality of their governments? The questions seemed almost too big for economics, which is why, for a long.

[Greg Rosalski]

Time, the popular economic models had focused on factors more directly associated with economic growth. Things that were measurable, things like population growth, investment in machines and infrastructure, education of workers, technological innovation.

[Jeff Guo]

But those models were silent on the deeper questions. Why did some countries end up with more infrastructure or education or technological innovation? Which brings us back to James and Duran that first day they met sitting at dinner. This is the part of the movie where their eyes meet and the intellectual sparks fly.

[James Robinson]

We almost said exactly the same thing, which was like, this is what economists study, but over there is all the things that I'm really passionate about. And then we were like, okay, you know, you only live once. Let's. Let's figure out how to bring these things together.

[Greg Rosalski]

All right? Jeff yolo let's do some economics research.

[Jeff Guo]

Yes. Yo, that is what happened. Fast forward a few years. They are collaborating on all sorts of papers and books, and pretty soon this dynamic duo becomes a trio.

[Greg Rosalski]

Obviously, you and James are, you know, you have this bromance going. At what point does Simon Johnson come in the mix?

[Daron Acemoglu]

So I was actually giving this talk at mit, and at the end of the seminar, he came to me and started talking and. And we hit it off.

[Greg Rosalski]

Simon Johnson, he's another young economist, a statistics whiz. And together, the three economists start working on this huge project that would eventually win them a Nobel Prize, trying to prove, using the tools of economics, that institutions are the reason why some nations are rich and others are poor.

[Jeff Guo]

And that was going to be pretty tough. You can't just compare a rich country to a poor country and say, well, the rich one's rich because it has, like, a better court system. There are a gazillion other possible explanations. It could even be the other way around. A country gets rich first, and then it gets the better court system.

[Greg Rosalski]

In an ideal world, the economists could just do what scientists basically do in a laboratory. You know, randomly give some countries good institutions and other countries less good institutions, and then see what happens to their economies. But of course, that's impossible. So they began searching for the next best thing. A natural experiment, a moment in history where, for kind of random reasons, different countries wind up with different kinds of institutions.

[James Robinson]

The thing that we latched onto is it's got to do with colonialism.

[Greg Rosalski]

Yeah, the era of European colonization when, Starting in the 1400s, a bunch of Western powers went around the world, invading and imposing different kinds of institutions, institutions that the economists believed had lasting economic consequences.

[James Robinson]

You know, why are institutions in Nigeria, you know, so lousy compared to the United States or Canada, you know? Well, that's got something to do with the very different types of institutions that were created in the colonial world.

[Jeff Guo]

And just to be clear, colonization was really ugly pretty much everywhere. We're talking things like genocide, slavery, just brutal practices of exploitation and domination. Colonizers sought to enrich themselves wherever they went.

[Greg Rosalski]

But there were also different patterns in how this all unfolded in different places, which seemed to create the conditions for the natural experiment that the economists were looking for.

[Jeff Guo]

Yeah, when the economists looked at this history, they saw two extremes in how Europeans colonized the world. At one extreme, Europeans themselves settled in large numbers. And these settler colonies, like in the US And Canada, they established institutions for themselves, institutions that tended to be more democratic, more egalitarian, that encouraged More investment and were more friendly to entrepreneurs and innovation. These places, of course, ended up being the richer ones centuries later.

[Greg Rosalski]

At the other extreme were colonies where Europeans did not settle in large numbers. Places like the Congo or Bolivia. There, European colonizers set up or maintained institutions aimed at helping a small group of elites ruthlessly extract wealth from indigenous people. Instead of investing there, they sent most of their resources and wealth back to Europe. These are the places that tended to become poorer countries.

[Jeff Guo]

Now, in order for the economists to use this moment to prove anything about institutions, they had to find a random reason why some places got settler colonies with their growth friendly institutions, and other places didn't. Because if the Europeans only put settler colonies in, like, the most lush, most fertile places, well, maybe those places were always destined to end up rich and prosperous, which would prove nothing about institutions.

[Greg Rosalski]

So the economists began searching for some kind of random factor unrelated to a country's potential for economic growth that affected which places got settler colonies.

[Daron Acemoglu]

And that's the problem. I started talking to Simon about, can we find some reasons why Europeans did one thing in one place and another thing in another place with long ranging implications?

[James Robinson]

And so we started reading like mad about colonialism and like, trying to understand the incentives and what explained different institutions? Why did such good institutions emerge in the United States and why not in Nigeria?

[Greg Rosalski]

Then the economists had their big breakthrough. They found a kind of random reason why Europeans put settler colonies in some places and not others. Disease.

[James Robinson]

The historical mortality environment for Europeans enormously influenced whether or not these places became settler colonies.

[Jeff Guo]

Yeah, unlike the locals, the Europeans had little immunity to local diseases like malaria or yellow fever. When Europeans tried to settle in places with those diseases, a lot of them died. So they ended up putting their settler colonies elsewhere. For example, the pilgrims who founded the Massachusetts colony, they originally considered moving to Guyana in South America, but then several.

[James Robinson]

Early colonizing attempts were basically decimated by tropical diseases and then decided like, okay, forget that, let's go to Massachusetts. Like, it's rocky, it's kind of unappealing, but we're not all going to die of tropical diseases.

[Greg Rosalski]

The economists go searching for data so they can conduct a statistical analysis of all this. They find it in a set of books by historian Philip Curtin. He had meticulously compiled records on how many Europeans died from diseases in colonies around the world.

[Daron Acemoglu]

We were just really fortunate that Philip Curtin existed and he did this work. And it's like, I mean, looking at his tables, just the differences, you know, when you see these mortality rate differences between different colonies, it was just mind blowing.

[Jeff Guo]

And that's when they start getting excited. Because this was the data that could help them prove that institutions matter for economic growth.

[Greg Rosalski]

That's because the way they saw it, the death rates of colonizers was this kind of random independent factor determining which places got growth friendly institutions and which places did not. This was the natural experiment the economists were looking for.

[Jeff Guo]

The economists hole up in Duran's office at MIT and go about crunching the numbers. They know they're onto something. Even though other economists found the whole thing a little out there.

[James Robinson]

The very distinguished economist came in and asked us, so what are you guys up to? And Daron, like all excited, explained this idea of sort of historical mortality of European settlers. And. And he just laughed himself silly. He thought it was the most ridiculous idea he'd ever heard in his life.

[Greg Rosalski]

But it turned out not to be ridiculous. In fact, it ended up being Nobel prize winning research. Mr. Distinguished Economist.

[Jeff Guo]

Yeah. The economists found this incredibly clear relationship. Places where colonizers were more likely to die hundreds of years ago now have worse economies and vice versa.

[Greg Rosalski]

When Simon shared this first round of results with Daron, he was like, wait, what?

[Daron Acemoglu]

I said, these are too good to be believed.

[Jeff Guo]

They're too good.

[Daron Acemoglu]

Yeah, exactly. So I said, give me the data, I'm going to check everything. And then, you know. No, they were that, that's, you know, they were right.

[Greg Rosalski]

This unlikely relationship between the rate of colonizer deaths and economic outcomes centuries later. The economists argued that the explanation for it could only be institutions. And here is a summary of the argument they made. Basically, where European colonizers were more likely to die of disease, they couldn't settle en masse. They instead set up institutions aimed more at exploiting the indigenous population. Those institutions led to lower economic growth in the coming centuries. But where Europeans were less likely to die, they moved in and set up settler colonies with more democratic and growth friendly institutions.

[Jeff Guo]

The economists wrote up their results and they started going around presenting this research. The first time was at a conference in 2000 at Stanford. And you know, economists typically are a pretty skeptical bunch, but it was electric.

[James Robinson]

You know, people were just somehow so fascinated by it. And we were like, oh man, you know, we hit it out the park, basically. It just like you could just see people loved it and they found it fascinating. It was really kind of elating. That's what I remember.

[Greg Rosalski]

This paper made a huge splash. It showed other economists this really cool new way of doing research on big questions. Using knowledge of history, the tools of statistics, and a bit of cleverness.

[Jeff Guo]

But there were still skeptics. Some of them were like, aren't you just pointing out a geographic pattern here? Like the places that had more diseases, where the Europeans put in the bad institutions. Those tended to be tropical areas, and maybe tropical areas were just doomed to have worse economies.

[Greg Rosalski]

So the economists went to work on their next blockbuster paper, aiming to shut down these sort of geographic arguments for why some nations are rich and others are poor. And they document this startling fact in the data. They call it a reversal of fortune. Before European colonization, the richest parts of the Americas were actually in what is today Mexico and parts of South America. That's where the Aztec and Incan empires were.

[Jeff Guo]

But after colonization, the fortunes of those regions flipped. The US And Canada are now way richer than any country found further south.

[James Robinson]

We thought this is just like devastating evidence on the impact a of colonialism in kind of reshaping those societies, and b showing that the geographical hypothesis can't possibly be right, you know, because there isn't persistence. When colonialism comes, it reverses this picture. Then it turns out that's not just true in the Americas, it's true more generally in this colonial world.

[Jeff Guo]

After the break, James and Jeroen go even bigger. They start to sketch out a grand theory about institutions, about what makes a good institution good and a bad institution.

[Greg Rosalski]

Bad, and they encounter some pushback.

[Simon Johnson]

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[Jeff Guo]

Mid-2000S, Duran, James, and Simon had taken the economics profession by storm. Their blockbuster papers on European colonization suggested that institutions could change the course of a country's economy. Now they wanted to go beyond the colonial world to weave together a grand theory of how institutions in general affect economic development everywhere.

[Greg Rosalski]

Yeah, like in general, why are some institutions so good for economic growth and other institutions so bad?

[Jeff Guo]

In 2012, James and Duran outlined their theory in a book called why Nations Fail. In it, they break down institutions into two categories.

[James Robinson]

One of the things we tried to do in our book is come up with this sort of flexible language to talk about institutional differences, which kind of encompasses many things. Like, I can say your society has sort of extractive institutions, or it has inclusive institutions, and that could incorporate all sorts of differences in the details.

[Greg Rosalski]

Okay, so inclusive and extractive institutions. This is at the heart of the theory they lay out in their book. Inclusive institutions are institutions that serve a wide swath of society. They kind of spread opportunity around, incentivizing and empowering people to succeed in a free market economy. And that's why James and Duran argue inclusive institutions are good for economic growth.

[Jeff Guo]

So an inclusive institution could be something like the patent system. The patent system gives anyone an opportunity to be rewarded for their ingenuity. That encourages people to create new ideas and technologies that end up enriching society.

[Greg Rosalski]

Or think of, like, how good public education systems give everybody an opportunity to learn skills and become more productive. Or how antitrust laws prevent monopolization of the economy.

[Jeff Guo]

Yeah, those are some examples of inclusive economic institutions. But James and Duran say, when it comes to economic growth, inclusive political institutions are also super important and sort of.

[Greg Rosalski]

The ultimate inclusive political institution. It's democracy. James and Duran have found in the research that democracy, generally speaking, it's good for economic growth.

[James Robinson]

We find very robust evidence that, you know, democracy is associated with better provision of public goods, better investment in education, in infrastructure, higher economic growth. Great, okay, so that's true.

[Greg Rosalski]

But he says all democracies aren't created equal.

[James Robinson]

There's many different types of democracies, and there's many different types of dictatorships. So I think. I think that's useful to know just in terms of, like, is it a good idea to push for democracy? Yes. You know, is pushing for democracy a kind of magic wand? No.

[Greg Rosalski]

Of course, this is a big, sprawling theory. And to this day, not everyone is convinced. For example, some have pointed to India and China as contradicting their theory. Back in 1980, their economies were neck and neck. They both had roughly the same GDP per capita, about $300 per person per year.

[Jeff Guo]

But over the last few decades, China has rocketed ahead of India. The average Chinese citizen is now five times richer than the average Indian citizen. But India is a democracy, it's supposed to have good institutions. Right. China is an authoritarian communist state.

[Greg Rosalski]

This one very prominent example doesn't fit so neatly in Dharan and James theory. But they argue, of course there are nuances to all of this.

[Daron Acemoglu]

Well, first of all, I don't think India is a poster child for good institutions. It has had a very troubled period, starting way before independence was a very exploitative colony. Independence was not easy. But more importantly, India has a social system that is very anti inclusive. The caste based system was very, very strong upon independence.

[James Robinson]

You know, people are born into this caste, you know, where occupations are rigid and specified and that enormously holds back social mobility and the potential of the country.

[Jeff Guo]

And as for China, they argue that China also at least partly fits into their theory. James says China didn't really begin its explosive growth until it adopted some inclusive economic institutions.

[James Robinson]

The transition towards economic growth in China starting in the late 1970s is clearly driven by this move to much more inclusive economic institutions. Dismantling central planning and cooperative agriculture, introducing incentives, getting rid of price controls, allowing people to make decisions and start firms. That's exactly our theory. But what's tricky is how could this happen under a totalitarian dictatorship?

[Greg Rosalski]

Yeah, there are still some big questions about this theory. Some have poked holes in their methodology. Others aren't quite convinced that you can boil down all institutions into two categories. Even the Nobel Prize committee, when it announced their award, they made it clear that their theory is not the final word on why some nations are rich and other nations are poor.

[Jeff Guo]

If you read the Nobel announcement at the very end, it has this weird sentence where they say, while their contributions, Asimoglu, Johnson and Robinson have not provided a definitive answer to why some countries remain trapped in poverty, their work represents a major leap forward. It seems like they're kind of saying, well, these are really interesting ideas, but we're not sure if they are definitive.

[James Robinson]

Yeah, I think, you know, this is social science. I think the world is very complicated, so. And our understanding of many things, you know, is incomplete. So we should be humble about that.

[Jeff Guo]

What is definitive is that James Duran and Simon have put a huge new spotlight on the power of institutions and brought statistical rigor to studying one of the biggest questions in economics. And that in itself is a historic contribution to the field.

[Greg Rosalski]

The research provides this kind of hopeful message that we can build a fairer society and a better economy through the hard work of improving our institutions. That could mean like working to improve schools or keeping government officials accountable, or like, I don't know, participating in an election or social movements. Unlike past theories which say a country is rich or poor because of its geography or its culture, this is a theory that gives us some agency over our nation's destinies.

[Jeff Guo]

This episode was produced by Willa Rubin with help from James Sneed. It was edited by Martina Castro and fact checked by Sierra Juarez, engineering by Gilly Moon. Alex Goldmark is our executive producer. I'm Jeff Guo.

[Greg Rosalski]

And I'm Greg Rosalski. This is npr. Thanks for listening.

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