The 2024 Nobel economics prize is a farce

The 2024 Nobel Prize in Economics was awarded to Daron Acemoglu, James Robinson, and Charles Johnson for their work on the economic and political factors that determine why some nations achieve wealth and stability while others fall into poverty and chaos.

Acemoglu and Robinson published their work in a book titled "Why Nations Fail: The Origins of Power, Prosperity, and Poverty" in 2012. According to the Nobel committee, this work has become a cornerstone in economic literature, offering a compelling analysis of the drivers of economic success and failure.

Daron Acemoglu was an economics professor from MIT and James Robinson a professor of government from Harvard.

The thesis of the book is quite straightforward: nations with “inclusive” economic and political institutions, defined as rule of law, democratic participation, political pluralism, will succeed; nations with “extractive” system, run by a self-serving ruling elite, will fail.

In their analysis, geography, history, culture, and natural resources are not key drivers of a nation’s destiny. Rather, political institutions and behavior of ruling class largely determine the economic success or failure of a nation.

While hardly a revolutionary theory (it dovetails perfectly with the Washington Consensus, fashionable back then), the book went to a lot of length to analyze numerous nations to make an empirical argument.

The book was published with lots of fanfare with glowing endorsements from no less than 6 Nobel laureates in economics from Kenneth Arrow to Michael Spence, the New York Times, Washington Post, Wall Street Journal, and BBC.

Francis Fukuyama and Niall Ferguson, two US and British imperial scholars respectively, obligingly lauded the book, in which both countries came out as exemplary nations with “inclusive” systems. The US succeeded as a result of inheriting the colonial institutions bestowed by the British.

Why Nations Fail was shortlisted for the Financial Times and Goldman Sachs business book of the year award 2012.

I read the book shortly after the publication since the authors spent quite some time analyzing China and contrasting with the US. I found they had very little original insights and merely recycled western stereotype caricature of China while their praise for the US somewhat unwarranted. I soon forgot the book.

If this is just another book that doesn’t age well, no one would have noticed, and I won’t be writing about it. After all, it’s par for the course for “social science” books to echo the ethos of the time when they were published. They are often dead wrong and people move on to the next shiny object.

However, 12 years after the publication of the book, the esteemed Nobel economics committee decided to award the authors the Nobel prize for this work.

So I re-read the book and did some research on what others thought about it when it first came out. I found my original impression of the book was validated and there were serious critiques, most presciently from Ron Unz of Unz Review. Let me dwell into this.

Robinson and Acemoglu analyzed the economic institutions and performance of numerous countries in the book. As the major economies of the world, China and the US were given special attention.

The authors used China and the US as the examples of what they characterized as “extractive” vs. “inclusive” systems.

They argued that China was destined to fail as it had an extractive economic system run by a venal, self serving elite. On the other hand, the US would win with its inclusive, democratic system run by rule of law, democratic check and balances, and broad citizen participation in decision making.

The Chinese system was described as closed from competition, incapable of innovation, and run by corrupt authoritarian leaders. Robinson and Acemoglu contended China’s economic performance to date (at the 2012 publication date), while impressive, was unsustainable and would falter.

They stated the US economic system thrived on creative destruction as the inclusive institutions encourage competition, reward innovation, and provide opportunities for new entrants into the market. The authors argued that the U.S.'s success was not due to geography, culture, or natural resources, but rather its inclusive institutions and an elite that work to advance the interests of the population.

13 years after the publication of the book, you have to wonder what planet Robinson and Acemoglu lived on when they wrote the book and what kind of ideological blindness has led the Nobel economics committee to award the prestigious prize to them.

Bear in mind the book was published in 2012 – four years after the 2008 financial crisis when “extractive” Wall Street elite gave the world the subprime crisis and Obama bailed out the financial masters of universe at the expense of high street.

Robinson and Acemoglu continued to use the US as the paragon of inclusive economic system and got glowing endorsements from other economic luminaries. This complete detachment from reality shows the intellectual bankruptcy of mainstream western economists.

It was one thing for honest scholars to write a book with such an ideological bent in the hay days of Washinton Consensus and maybe even win the Nobel prize pre-2008 but it truly boggles the mind for Robinson and Acemoglu to propose such a thesis in 2012 and win Nobel prize in 2024 when empirical data and facts have proven their analysis wrong. Neoliberals like Jake Sullivan openly admitted the Washington Consensus junk economics was the root cause for the deindustrialization and weakening of the US in a 2023 speech at the Brookings Institute.

13 years later, it is clear that the Chinese leadership, rather than the self serving and “extractive” elite described by the authors, are meritocratic and effective. The country has made enormous progress since then and now enjoys one of the most competitive economies and is a world class innovator.

On the other hand, the label of being “extractive” seems to fit the US much better with its stagnant wages for the 99% and staggering concentration of wealth to the 1%, high inflation and indebtedness, crumbling healthcare and infrastructure, and a political system dominated by moneyed special interests.

Contrary to Robinson and Acemoglu’s argument, China’s political system is much more inclusive than the US – 75% of the 37 most senior leaders (members of the Politburo Standing Committee) since 1990 come from working class background while there are 13 billionaires in Trump administration’s senior ranks. The Communist Party of China has nearly 100 million members.

China’s economic system is also much more inclusive than the US – 65% of GDP in China goes to household income vs. less than 50% in the US. The Chinese working class enjoys rising wages, low inflation, improving healthcare and education, and world class infrastructure.

In the “extractive” Chinese system, the government has capped bankers’ bonus, reduced government employees’ salary, and sentenced corrupt officials to the death row.

On the other hand, the “inclusive” US system has witnessed millions cheering the killing of the United Healthcare CEO. Nancy Pelosi has an ETF fund that specifically mirrors her stock portfolio and achieves returns far above the best money managers. And tech oligarchs literally buy presidency and act as puppet masters.

While mainstream economists and commentators heaped compliments to the book, Ron Unz of Unz Review wrote a brilliant critique of the book when it was first published in 2012. China's Rise, America's Fall, by Ron Unz - The Unz Review

Ron pointed out Chinese government’s poverty alleviation efforts, the innovations from Huawei, China’s high speed rail program, and improving standards of living among average Chinese citizens as counter examples of Acemoglu and Robinson’s “extractive” characterization.

Ron also pointed out the income inequality, political capture by corporate oligarchs, and lack of democratic participation in war decisions as clear examples that contravene Acemoglu and Robinson’s rosy depiction of the US’s “inclusive” system.

While arguing against the “extractive” label on China, Ron correctly pointed out China was beset by serious issues with pollution, inequality, housing bubble, and corruption. Interestingly, when President Xi Jinping ascended to the top leadership role in 2013, he specifically went after the issues identified by Ron – extensive crackdown on corruption and pollution, common prosperity push, bursting of the housing bubble, and reining in tech monopolies. Hardly the behavior of “extractive” ruling elite.

Read my article on the subject 10 Achievements of Xi Jinping. https://huabinoliver.substack.com/p/10-achievements-of-xi-jinping-598

Looking back, Ron was prescient in his critique and proven completely right in his analysis.

Clearly Why Nations Fail has not aged well. While the thesis in theory seems to make sense – an economy will only prosper in an inclusive economic and political system, the authors’ analysis and prediction about China and US are completely wrong.

It is hardly news that academics in ivory towers, especially of the “social science” variety, are seldom right about the real world. The amazing thing is that the Nobel economics committee, with 20/20 hindsight, still awarded the prize to such failed work. The power of denial and the instinct to conform to an ideological narrative is truly boundless.