This year’s Nobel prize exposes economics’ problem with colonialism

Daron Acemoglu, Simon Johnson and James Robinson have been awarded the 2024 Nobel memorial prize in economics for their influential work on how institutions shape economic development. Some would say the decision to award these scholars the Nobel was long overdue.

The paper that formed the basis of their work is one of the most cited in economics. Acemoglu and Robinson’s subsequent book, Why Nations Fail, has also been hugely influential.

These works have inspired a rich debate on the relationship between societal institutions and economic development – so in that sense, congratulations are in order. But they have also been the subject of substantial criticism. In the aftermath of the award, it is fitting to highlight the blind spots in their analysis.

The most important piece of criticism concerns the connection between the quality of a country’s societal institutions and its level of economic development. Acemoglu, Johnson and Robinson’s work divides institutions into two categories: “inclusive” and “extractive”.

Inclusive institutions – such as those that enforce property rights, protect democracy and limit corruption – foster economic development, according to the laureates. In contrast, extractive institutions, which give rise to a high concentration of power and limited political freedom, seek to concentrate resources in the hands of a small elite and thus stifle economic development.

The laureates claim the introduction of inclusive institutions has had a positive long-term effect on economic prosperity. Indeed, these institutions are today found primarily in high-income countries in the west.

A huge problem with this analysis, however, is the claim that certain institutions are a precondition for economic development.

Mushtaq Khan, a professor of economics at Soas, University of London, has analysed Acemoglu, Johnson and Robinson’s work extensively. He argues that it mainly shows today’s high-income countries score higher on western-based institution indexes, and not that economic development was achieved because states first established inclusive institutions.

In fact, history is rife with examples of countries that grew rapidly without having these inclusive institutions in place as a precondition for growth. East Asian states such as Singapore, South Korea and Taiwan are good examples. Most recently, so too is China.

Yuen Yuen Ang’s award-winning books on China’s development process have laid out in detail how China was riddled with corruption during its growth process. In the wake of this year’s Nobel award, Ang went as far as saying that the laureates’ theory not only fails to explain growth in China, but also growth in the west. She points out that institutions in the US were smeared with corruption during the country’s development process.

Ignoring the brutality of colonialism

Nations are not wrong to pursue some of the inclusive institutions outlined in Acemoglu, Johnson and Robinson’s work. But another worrying part of their analysis is that it legitimises the supremacy of western institutions – and, at worst, processes of imperialism and colonialism.

Their work has, indeed, been criticised for not paying attention to the brutality of colonialism. We need to dig a bit deeper into their methods to understand this criticism.

The laureates establish their claim by looking at long-term development in settler colonies versus non-settler colonies. In settler colonies, such as the US, Canada and Australia, Europeans established inclusive institutions. But in non-settler colonies, which include large parts of Africa and Latin America, Europeans established extractive institutions.

Acemoglu, Johnson and Robinson point out that, over time, settler colonies perform better. European institutions are thus better for development, they argue.

But, considering that the process of colonisation is a central method of their paper, it’s a mystery that the laureates do not discuss the costs of colonialism more broadly.

Even in settler colonies, where inclusive institutions were eventually developed, years of violence – in many cases verging on the genocide of native populations – predated the development of such institutions. Should this not be factored into the development process?

After receiving the award, Acemoglu said that normative questions of colonialism didn’t concern them: “Rather than asking whether colonialism is good or bad, we note that different colonial strategies have led to different institutional patterns that have persisted over time.”

This statement might come a shock to some people – why is Acemoglu not concerned about whether colonialism is good or bad? But for those familiar with the inner workings of the economics discipline, this statement doesn’t come as a surprise.

It has, sadly, become a badge of honour in mainstream economics to analyse the world without a normative lens or value judgments. This is a broader issue with the discipline and, in part, explains why economics has become increasingly insular and distant from other social sciences.

The Nobel prize in economics, which actually wasn’t among the five original Nobel prizes, also illustrates this problem. The list of past winners is narrow in geographical and institutional scope, mainly consisting of economists based at economics faculties in a small number of elite universities in the US.

Furthermore, a recent study found the institutional and geographic concentration of awards in economics is much higher than in other academic fields. Almost all the winners of major awards have had to journey through one of the top US universities (limited to less than ten) in their career.

This year’s Nobel prize in economics is no exception. Perhaps this is why it feels like every year, the prize goes to someone who asks “how does a change in variable X affect variable Y”, rather than asking difficult questions about colonialism, imperialism or capitalism – and daring to question the supremacy of western institutions.

Jostein Hauge does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.