The Nobel Prize In Economics

The Nobel prize goes to Daron Acemoglu, Simon Johnson and James Robinson for their work on institutions, prosperity, and economic growth. Here is a key piece summarizing their work: Institutions as a Fundamental Cause of Long-Run Growth.

This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two “quasi-natural experiments” in history, the division of Korea into two parts with very different economic institutions and the colonization of much of the world by European powers starting in the fifteenth century. 

We then develop the basic outline of a framework for thinking about why economic institutions differ across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favor of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions allocate de jure political power, while groups with greater economic might typically possess greater de facto political power… 

Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement, when they create effective constraints on power-holders, and when there are relatively few rents to be captured by power-holders.

From Marginal Revolution.

There is a strong school of thought in the economic development literature that argues that institutions and rules are not enough and that culture matters too.

The Nobel Prize In Economics

Claudia Goldin wins the Nobel! Goldin is an economic historian, she was inspired to go into economics by Alfred Kahn (later the architect of airline deregulation) and became a student of Robert Fogel at the University of Chicago. Goldin pioneered the historical analysis of the labor market and gender. If you want to read a single Goldin piece then very fortuitously and appropriately her NBER paper called…Why Women Won just appeared as an NBER working paper! The Nobel Prize committee’s Scientific Background is a good summary of her work including her important work on education with Larry Katz.

From here (with more good material available at the link). The abstract of the new NBER paper linked above states:

How, when, and why did women in the US obtain legal rights equal to men’s regarding the workplace, marriage, family, Social Security, criminal justice, credit markets, and other parts of the economy and society, decades after they gained the right to vote? 

The story begins with the civil rights movement and the somewhat fortuitous nature of the early and key women’s rights legislation. The women’s movement formed and pressed for further rights. Of the 155 critical moments in women’s rights history I’ve compiled from 1905 to 2023, 45% occurred between 1963 and 1973. The greatly increased employment of women, the formation of women’s rights associations, the belief that women’s votes mattered, and the unstinting efforts of various members of Congress were behind the advances. But women soon became splintered by marital status, employment, region, and religion far more than men. A substantial group of women emerged in the 1970s to oppose various rights for women, just as they did during the suffrage movement. They remain a potent force today.

A Clever Research Design Tracks Corruption In Italy

It is possible to identify lies about birth dates in public records statistically, even if you can't tell which particular birth dates are lies. This trick was used to track honesty by region in Italy, and shifts in the honest of different regions over time.

Using census data, we study false birth-date registrations in Italy, a phenomenon well known to demographers, in a setting that allows us to separate honesty from the benefits of cheating and deterrence. By comparing migrants leaving a locality with those who remain in it, we illustrate the tendency of Italians to sort themselves across geographic areas according to their honesty levels. Over time, this tendency has modified the average honesty level in each locality, with relevant consequences for the distribution across geographic areas of outcomes like human capital, productivity, earnings growth, and the quality of local politicians and government.

Massimo Anelli, Tommaso Colussi, and Andrea Ichino, "Rule Breaking, Honesty, and Migration" 66(2) Journal of Law and Economics (2023) (Supplemental Data here). This closed access paper is analyzed in the comments at Marginal Revolution and at another blog that it links to discussing the paper.

Angus Deaton Wins Nobel Prize In Economics

Angus Deaton, the winner of the Nobel Prize in Economics is particularly known for his work in empirically quantifying the relative economic well being of people in different countries, something that conventional domestic economic indicators do poorly because they assume too much that is really particular to developed Western economies.  In particular, he advanced to cause of measuring third-world poverty.  He was on the short list of predicted possible winner.

Descriptive Economists Rock Nobel Prize

This year's Nobel Prize winners for Economics made their mark describing how institutions and their governance work in the real world.

Elinor Ostrom of Indiana University showed that management of collective natural resources often works better than conventional economic theory would expect. A recent book she served as editor for discussed the need to rethink the fundamental premises of intellectual property law with a focus on concepts like the open source movement.

Oliver Williamson of Berkeley is known for his contract oriented research on how transaction costs, agency problems, imperfect information and similar frictions and drive strategies of corporate governance. One recent paper by Williamson finds common cause with Joseph Schumpeter in attaching economic importance to the way that firms are organized and governed, and complaints that strategic issues in the private contractual ordering of firms "had been ignored by neoclassical economists from 1870 to 1970."

The awards are made in a climate of massive backlash against the disciplinary program of academic macroeconomics and modern finance theory, which failed to understand the financial crisis because their models were too disconnected from the realities that drive the collapse of economic bubbles. In particular, critics argue that corporate governance created the wrong incentives for managers in big business and the investment banking world.

As Krugman explains the old status quo:

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it’s all very complicated, and has deep historical roots, and … Meanwhile, Keynesian economists, using very simple mathematical models, basically said “Push this button — we need more G”.

And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.

In the current cycle the time for the "More G" Keynesian's is passing and the time to improve our institutions so that this doesn't happen again for a long time has come. Fortunately, Nobel Peace Prize winner President Obama's own economic leanings are willing to deal with the "it's all very complicated" work that it takes to rebuild our economy on a better foundation.

Minsky Is The New Schumpeter

While I was in high school, I took a microeconomics class at the local university from the father of one of my high school friends, now decased. He included a material about Joseph Schumpeter (1883-1950), who is most famous for coining the term "creative destruction" to describe the mechanism of capitalism. His big insights included the link between technological change and economic growth, and the observation that the leading firms in one technological era are rarely the firms that come to dominant the next. Schumpeter is my favorite economist.

Schumpter's intellectual successor in our era, Hyman Minsky (who trained under Schumpter), died over a decade ago and is rapidly coming into vogue as the man who captures the essence of the current financial crisis. Some of Minsky's greatest quotes:

Instability is an inherent and inescapable flaw of capitalism.

and

There is nothing wrong with macroeconomics that another depression [won’t] cure.