The 2024 Nobel Prize in Economics: Explained

this fagus Rick's Bank prize in economic Sciences in honor of Alfred Nobel known more commonly but less correctly simply as the Nobel prize in economics is an annual prize awarded to economists who have made significant contributions to the social sciences the reason why the Nobel prize in economics technically has a different name is because it was not one of the original prizes established by Alfred Nobel when he set up the foundation to clean up his Public Image as a bomb maker it was later added by the Swedish Central Bank which funds the prize money separately

from the other Awards which come out of the Nobel Foundation the joke is that econom wanted a seat at the table with the real scientists and the only way to get there was to get a sovereign Central Bank to foot the bill now that's a little bit unfair because well it hurts my feelings but also because economics does genuinely have the capacity to massively improve the lives of billions of people in the same way that the other sciences and disciplines do if they're implemented correctly there is probably no greater example of that ability for practical

economics to make the world a better place than the winners of this year's prize he was awarded to these three gentlemen Darren Asam MoGo Simon Johnson and James a Robinson beyond their specific contributions to the social sciences that they won this year's award for these three gentlemen are genuinely some of the most influential economists in the world as MoGo and Robinson are probably best known for their book why Nations fail which is effectively a summarized version of what they won their prize for but their work as well as the work of Simon Johnson goes beyond

that their theories studies and recommendations have impacted policy in some of the most vulnerable economies in the world and have also been used to make sure some of the most prosperous countries in the world stay that way these three men have had such a profound impact on the field that when I congratulated them on their prize I rather awkwardly admitted that I assumed they'd already won it Anyway by pure academic metrics asoglu himself is the third most referenced Economist in the world with his work being cited more than Krugman fredman or even canes what they

won their award for specifically though is their explanation for why some countries are rich and some countries are poor so basically the biggest question in all of macroeconomics today the top 20% of countries in the world are 30 times richer than the poorest 20% and even though the world is growing wealthier as a whole the ratio is not changing which means the poorest countries are not catching up obviously the important question here is why which this year's laurates have presented a compelling solution to in their Collective Decades of research their theories address a lot of

macroeconomic results that just don't inherently make a lot of sense on a surface level like why some countries that are completely devoid of Natural Resources arable land or even a good position for trade are hundreds of times wealthier than other countries that are literally sitting on top of gold mines if all of that wasn't enough by itself probably one of the biggest reasons that this year's winners were chosen was because they offer solutions to these issues and workable strategies to avoid them becoming a problem in the first place so what were the ideas that won

this year's Nobel Prize where can they be seen in the real world and finally why are they raising alarm Bells about our immediate future to truly understand any country's modern economy it's essential to examine its historical Evolution including the significant political and economic shifts that shaped the nation but learning about the past isn't just for economists uncovering the truth of your own family history can be just as fascinating and insightful we've partnered with my Heritage a platform that lets you discover the stories of your relatives and your ancestors by searching through over 19 billion historical

documents for you Charlie one of our team at economics explained use my Heritage to find details about members of his family and especially of his grandfather on his mother's side who was a holocaust Survivor there aren't many basic records like his birth certificate for obvious reasons but by looking through connections he was able to create a pretty comprehensive map of his family dating back to the late 1800s and find out his great-grandmother's maiden name and her extended family The Jacksons the search doesn't stop there with truly amazing insights like a newspaper clipping about Charlie's great-grandparents

wedding in 1895 and images of his grandfather's engineering patn and once he added a lot of his immediate family the instant discoveries page gave him the marriage records of his mother's parents from 1953 in Westminster in the UK and further research surfaced a beautiful picture of their wedding day that his family had not seen before it looked even better after using my Heritage picture restorer to colorize and sharpen it and Charlie got it framed for his mom as a Christmas present so why not start building your family tree you don't know if you don't look

and you could even have living relatives you never knew about you can get a 14-day free trial of my Heritage when you join using our Link in the description or by directly scanning this QR code when looking at a list of national economies it can be hard to determine some kind of common characteristic between wealthy countries and poor countries places like Venezuela which are sitting on top of enough oil to make their residents generationally wealthy a poor while Ireland a country with very few natural resources has a GDP per capita almost 25 times greater similarly

landlock countries are largely some of the poorest nations in the world because of restricted global trade via Ocean shipping which kind of makes sense except for the fact that a few landlock countries are some of the richest places in the world with Switzerland Luxembourg and lichenstein being particular standouts finding a common trait that determines economic success or failure seemed pretty elusive until this year's winners suggested that it wasn't natural resources Geographic position population sizes or anything like that which separated wealthy nations from poor Nations it was instead almost universally the stability and reliability of those

Count's institutions at its most foundational level an economy is really just a system for effectively allocating resources between participants and the best way to ensure that participants feel compelled to create value for that system is for them to reliably be rewarded for their efforts now this applies to all institutions from something as large as central banks National treasuries all the way down to local planning officers small businesses the media and even individual public servants if an economy is full of well-managed honest and effective institutions then its people potential investors businesses and the government itself can

get to work producing value confident in the fact that their investments in whatever form they take won't be yanked away from them a worker in an advanced economy with good institutions can do something like confidently spend years studying for a degree that would give them access to a skilled profession like engineering because that country has institutions in place to make sure that the degree they're getting is from a reputable institution there are bodies in place to require that degree to get a license that license is needed to sign off on engineering projects and that engineering

projects get paid for because they are fair and impartial courts to enforce contracts a worker from an economy without any of these institutions would find it difficult to make a living designing buildings if contracts just go to whoever has the best government connections and if there are no systems in place to make sure that qualifications are met then there probably won't be the same investment into obtaining skills in the first place even something as simple as a government Department that issues driver's licenses based on reasonable and fairly tested standards means that insurance companies will have

more confidence in insuring truck drivers which makes local trade more commercially viable which helps businesses operate which employs people who can pay taxes to an effective tax agency to fund services like a government Department that issues licenses now of course this is just one very oversimplified example but the core idea is the same advanced economies with good institutions let people invest a lot of resources into becoming highly specialized safe in the knowledge that if they efficiently do their specific job there are systems in place to make sure they can trade that work in for everything

else they'll need if everybody in an economy can become more specialized in something they do really well then the economy will be richer now this is a sound theory that does hold true across basically every economy in the world today it's almost impossible to think of a poor country that has good fair and reliable institutions likewise it's equally difficult to think of a rich country that has stayed rich without these institutions now this year's laurates weren't actually the first people to recognize this correlation but correlation doesn't equal causation it's possible that rich countries just have

good institutions because good institutions are expensive a government that pays all of its workers well enough to avoid the Temptations of bribery big well-funded Education Centers and financial systems employing well-qualified and competent managers are all kind of expensive what's more is that in an increasingly globalized World there is the Temptation for individuals and businesses that do operate these institutions to just move to rich countries where they can be paid more for their services in a global phenomenon most commonly referred to as brain drain so the first thing that the laurates had to show was that

good institutions made countries rich instead of rich countries just been able to afford good institutions the way they did this was by looking back through history and tracing the scars of colonialism in their research of economic history the laurits found interesting patterns amongst former colonial regions the regions that were the richest before colonialism were the poorest after colonialism all other things been equal this shouldn't be the case because wealth before modern economic systems was primarily determined by how arable the land was and if it had natural resources not too dissimilar to the assumptions of today

the difference was that when the colonial Empire started operating in regions that were already wealthy and prosperous they had to establish institutions that would suppress the existing local populations and turned them into a subservient labor force to help them with extracting resources on on the flip side less prosperous regions with less dense populations weren't quite as threatening but unfortunately for the colonizers they had to do a lot of the work themselves the institutions that were established in the regions that were wealthier before colonialism were all about controlling and taking advantage of the existing population this

meant that when the colonial empires left or were forced out it was easy for new parties to come in and take advantage of the same institutions that were all about controlling people these institutions on top of being more prone to poor management and Corruption also encouraged economic exploitation rather than productive development now back 400 years ago that was a perfectly good way to claim a lot of wealth but these days the wealthiest economies are those that can encourage value creation rather than value extraction it also didn't help that the empires running these militarized colonies also

mostly left after they were kicked out creating a power vacuum and taking with them their knowledge of how to run these institutions even if they were highly exploitative now on the other hand the regions that had smaller less dense populations were simultaneous vious ly less threatening to the colonial empires that didn't have to go up against a standing military but also less useful because there wasn't a ready-made labor force provided to them this meant that they had to provide their own labor force through Colonial settlers even if their work would be heavily supported by slave

or convict labor imported from elsewhere the institutions set up in these kinds of environments most notably the Modern Day USA but also Canada New Zealand and Australia had to support these independent operations rather than treating the whole Colony as a work site there exclusively to produce spices or tea or whatever these settler colonies had to encourage people to travel from Europe to make a life there so they created systems to protect their Investments dish out property rights and give them political Liberties that were clearly not afforded to the indigenous inhabitants of the other colonies again

when these colonial empires took a step back or were forced out these regions that were less prosperous before colonialism just inherited these institutions they were more conducive to running a sound economy the settlers also tended to remain in these colonies and adopt them as their own homes after claiming Independence which means that there was more continuity and the knowledge of how to manage these institutions was maintained in the new country now it's important to recognize that just because the Nations that formed in these regions are more prosperous in the modern day doesn't necessarily mean that

the indigenous population fared that much better and tragically there is of course still a divide between these groups within these economies just like there's a gap between these economies now with that essential piece of context one of the clearest examples of this playing out in the real world was actually outlined in the announcement of this year's winners in something that rather poetically called The Tale of Two Cities the city of nalis is divided by a fence that runs east to west in the North nalis Arizona boasts incredibly High incomes by global standards a long life

expectancy good access to education and of course they have good reliable institutions that provide property rights legal protections a stable currency a relatively corruption free system of rules and regulations and all of this is overseen by representative governments all the way up from the local mayor to the president on the other side of the fence nalas in sonor Mexico is considerably poorer doesn't enjoy the same quality of life and has significant issues with organized crime and Corruption these are two halves of the same city that share the same culture the same geography the same climate

and even the same Heritage the only difference is whether they're operating under the institutions of the USA or the institutions of Mexico Mexico was home to the Aztec which during the Spanish Colonial period was something that needed to be controlled and has contributed to institutions that are less representative even to this day it was this historical context and dozens of examples they've studied across the world that allowed this year's laurates to back up the idea that good institutions do create Rich economies it's not just that rich economies can afford to have good institutions now that

might sound like a lot of background research just to prove a causal relationship but with Stakes this high it was essential otherwise their advice to Nations focusing on creating these robust institutions would be like telling a homeless person to just buy a home instead they've been able to do what a lot of economists would never dare to do and actually make some con constructive recommendations to improve a bad situation so Asam MoGo Johnson and Robinson demonstrated a causal connection between running good institutions which means that good policy can be recommended to support those institutions the

problem is that's easier said than done if setting up fair well-managed institutions could make an economy wealthier with no trade-offs then obviously every economy would do it the problem of course is that unfairly run institutions often benefit the people who make the policy and even if they have their people's best interest in mind running these institutions takes a lot of skills and experience now the first part is obviously the biggest hurdle for a lot of economies the elites that make the rules receive an economic benefit from making those rules to favor them at the expense

of their people and they don't want to give that up unless they can be sure their economic situation would improve now often times it actually could by giving back a bit of control institutions almost always run better when they're beholden to the people it is theoretically better to be a national leader of a highly prosperous economy than the despot of a failing state but there's no guarantee that those people would keep their positions of power and wealth if they introduce fairer systems this puts a lot of economies into a vicious stalemate where both the ruling

class and the people would be better off in a more egalitarian society but neither side can trust the other to make the first move now what the laurates found throughout history is that the most effective way for economies to transition from one with poor institutions was through the peaceful nonviolent transfer power rather than revolutions which tend to create a whole new ruling class and are just generally more trouble their worth now these might not sound like insanely cuttingedge ideas but it's important to remember that this prize was awarded for work done over decades empirically showing

that fairer and better managed institutions were not only one of the causes of economic success but probably the biggest cause was huge and before the work of these men there was no clear consensus on the economic value of a democracy with checks and balances versus something like a benevolent dictatorship now obviously it's incredibly hard to distill the work of literal Nobel prizewinning Research into a concise video but if you want more details I can wholeheartedly recommend their book why Nations fail it goes into fascinating historical case studies in a style not too dissimilar to the

way that we do on this channel but instead of some random guy on the Internet it's written by two Nobel prizewinning economists we were also lucky enough to speak with Professor Asam MoGo earlier this year and he set the record straight on exactly what has been holding Africa back from the economic success that it's capable of you should be able to click to that video on your screen now or if you want to listen to our full interview with him it's available on Spotify and most other streaming services thanks for watching mate bye