On Oct. 14, the Royal Swedish Academy of Sciences awarded the prestigious Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to MIT economists Daron Acemoglu and Simon Johnson PhD ’89 along with James Robinson, a political scientist at the University of Chicago. The Nobel Prize was awarded to the researchers “for studies of how institutions are formed and affect prosperity”. As the committee concluded, the research of the laureates shed light on differences in the varying prosperity between nations and the root cause of it.

The researchers found that economic institutions established by the European settlers played a key role in the subsequent prosperity of those nations. Here, two contrasts were established. For starters, in areas with high settler mortality and dense local populations, the Europeans were not incentivized to settle their people. Hence, they established “extractive” institutions where the power was concentrated in the hands of the ruling elite allowing them to exploit the indigenous population.

Second, in areas with low settler mortality and sparse local populations, the colonizers were encouraged to settle their people. Due to this, they established “inclusive” institutions, where voting rights were granted, democracy was established, and corruption was limited.

Using Nogales, on the border between the United States and Mexico as an example, they illustrated the impact of these two institutions. In Northern Nogales, located in Arizona with inclusive institutions, the region experienced greater economic growth compared to its southern counterpart present in Mexico with extractive institutions. Thus, one of the crucial aspects of their research showed that inclusive institutions foster economic growth while extractive institutions do not.

Speaking to MIT News, Johnson stressed the importance of history: “I hope it encourages people to think carefully about history. History matters.”

Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan. Belonging to England, he received his BA in Economics and Politics from the University of Oxford, followed by an MA in Economics from the University of Manchester, and finally his PhD from MIT in 1989. He also served as the Chief Economist of the International Monetary Fund from 2007 to 2008.

Acemoglu and Robinson are best known for co-authoring the famous book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” (2012), in which they argued that manmade institutions dictate economic progress, not geography, culture, or disease. This and more empirical research across two decades among the three collaborators ultimately landed them the Economics Nobel.

With regards to what the future impact of this research could be, Robinson says “I think maybe ideas are important in terms of giving people levers or giving people ways to think about the problems in their society.”

Without a doubt, Johnson, Acemoglu, and Robinson have presented a compelling thesis that is a result of decades of hard work, research, and experimentation. This sheds light on how nations have achieved varying degrees of prosperity enriched the current scholarship and acts as a lens for self-reflection to analyze why some nations are poor while others are rich. Perhaps, it holds the power to influence the implementation of economic institutions that can allow countries to attain prosperity amidst the palpable global inequality.