Rethinking national prosperity through institutions

Each autumn, a telephone call from Stockholm launches one or a few scholars to international fame with the bestowal of the Nobel Memorial Prize in Economic Sciences — a process that Irving Wallace dramatised in his 1962 potboiler The Prize.
This year, the call went to three figures who are already well-known: the economists Daron Acemoglu and Simon Johnson of the Massachusetts Institute of Technology and the political scientist James A Robinson of the University of Chicago. The three were recognised for their “studies of how institutions are formed and affect prosperity”, and in an interesting twist, the award comes exactly 15 years after the committee conferred it on Elinor Ostrom for her own work on institutions, particularly “for her analysis of economic governance, especially the commons”.
Prof Acemoglu, Prof Johnson, and Prof Robinson (or AJR, as they are known) won the award primarily for their research into the role of colonialism in determining the economic fate of nations. Prominent social science projects from Max Weber’s The Protestant Ethic and the Spirit of Capitalism to Jared Diamond’s Gun, Germs, and Steel: The Fates of Human Societies have long sought to explain the “great divergence” between Europe and its wealthy offshoots and the rest of the world.
While AJR had the same goal, they pursued it in a new way by asking why societies that were once relatively rich are now relatively poor and vice versa.
In a 2002 paper, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”, AJR concluded that the key determinant of future growth is whether a country has “inclusive institutions” that allow economic gains to be shared broadly, versus “extractive institutions” that siphon wealth to a narrow elite.
Whether a colonial power bequeathed inclusive or extractive institutions depended on various environmental and other factors. For example, in their most widely cited paper, “The Colonial Origins of Comparative Development”, AJR argue that the most effective predictor of future economic growth was how hospitable the terrain was for European settlers. The colonisers invested in good institutions in regions where their own chances of survival were higher– namely, the New World colonies of North America, Australia, and New Zealand.
AJR’s scholarship is sophisticated and innovative, and I, for one, appreciate their focus on institutions. They have continued the tradition pioneered by the Nobel laureate economist Douglass North in his magnum opus, Institutions, Institutional Change and Economic Performance. Their prescriptions, however, are not new. Conventional “law and economics” theories and the Washington Consensus have long emphasised the importance of the rule of law in underwriting growth.
By contrast, Ostrom’s work on community-led institutional solutions genuinely broke new ground. She fundamentally altered our understanding of the role played by “polycentric institutions” that go beyond the dichotomies of market and state. Until she undertook her ground-breaking work (summarised in Governing the Commons: The Evolution of Institutions for Collective Action), it was widely assumed that common property — including critical ecological configurations like forests, water systems, fisheries, and the global atmosphere — was inherently inefficient.
Ostrom’s extensive empirical investigations into self-organised systems — from water-management in California to irrigation in Nepal — demonstrated that this is not always the case. And her lab experiments showed that people are more willing to enforce mutually agreed rules than previously thought.
Most critically, Ostrom’s work examined the variables that correlate with, or create conditions for, cooperation to solve collective-action problems, showing (contrary to Garett Hardin’s classic work) that the challenges associated with the commons need not end in tragedy. By demonstrating that the success of institutions depends heavily on participants’ engagement with, and investments in, them, she pointed towards an alternative explanation for AJR’s results.
Recall AJR’s argument that countries where Western institutions were imposed, but where Europeans also settled in large numbers and thrived, later experienced the most rapid and robust growth. As I argue in a recent paper, the source of these societies’ success may not have been their inherent institutional superiority but rather their inhabitants’ relative psychological familiarity with those institutions.
After all, the cognitive and contextual mismatch between institutions and their surrounding environment has long been understood to play a part in the difficulties surrounding “legal transplantation” (importing legal codes from elsewhere).
In Wallace’s novel, the protagonist poignantly wins the Nobel Prize in Literature for a book called The Perfect State. While we wait for that ideal institution to be devised, we remain stubbornly reliant on flawed people to prop up our institutions.
Fortunately, Ostrom showed that this is possible. As we celebrate AJR’s contributions, let us not forget Ostrom’s. While Prof Acemoglu and Prof Johnson’s bestseller Why Nations Fail: The Origins of Power, Prosperity, and Poverty illuminates one path to prosperity, Ostrom’s scholarship shows that there could be many. ©2024 Project Syndicate
Antara Haldar, Associate Professor of Empirical Legal Studies at the University of Cambridge, is a visiting faculty member at Harvard University and the principal investigator on a European Research Council grant on law and cognition.