This week’s awarding of the Nobel Prize in Economics to Daron Acemoglu, Simon Johnson and James Robinson is making many of us feel like winners. (Especially those in the know who refer to this group by the acronym “AJR”).
The public has won in that all three have written extensively for a general audience, which is unusual for academic economists. Acemoglu and Robinson’s 2012 book why countries fail ‘ is a bestseller, and Mr. Johnson has published several notable books on financial regulation and innovation. Economic historians have won in that Acemoglu, Johnson, and Robinson’s most famous works were about the historical process of development in former colonies. The left is winning in that Mr. Acemoglu has recently become a vocal supporter of policies that expand worker power and is speculating on the possibility of “AI-powered communism.”
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But you can’t get to 4,400 citations without getting a few critics. The fairest criticism of the trio is that, while their theories are sophisticated, the data on which they are based are shaky at best, and their results do not stand up to scrutiny.
It’s not as bad as it sounds. All science advances through new discoveries that later overturn themselves. Acemoglu, Johnson, and Robinson are great economists, and I think even their flawed empirical findings can be important in advancing the field. Physicist JJ Thomson, another Nobel laureate, famously incorrectly proposed that atoms do not have a nucleus, but this does not diminish the importance of his earlier discovery of the electron. do not have.
But this week, as the Nobel laureates’ work receives considerable and largely uncritical public attention, we talk about its shortcomings and the need to subject seminal discoveries such as theirs to further scrutiny. I think that’s important.
AJR is most famous for its intervention in one of the longest-running debates in economics: Why are some countries so rich and others so poor?
Collaborators sought to refute geographical determinists (particularly Jared Diamond) who argued, for example, that Europe was richer than Africa because of the characteristics of the land. AJR’s answer is that some countries have better, more “inclusive” institutions that allow the fruits of economic growth to be widely shared, while others have small cabals reaping all the profits. It was argued that there was an “extractive” system that allowed for a monopoly. The former grows over the long term. The latter is not.
Their most famous paper, “The Colonial Origins of Comparative Development: An Empirical Investigation,” sought to measure the effectiveness of inclusive and extractive institutions. To do this, one had to find some factor that caused a particular region to have a particular type of institution, which was otherwise unrelated to economic development. In econometrics, these are called “instrumental variables,” and the theory is that by controlling for such variables, we can isolate the causal effects of the independent variable we are studying (in this case, the type of institution).
Their indicator was “the frequency of death among European settlers.” Consider Australia on the one hand and Nigeria on the other. Both were British colonies. I think it’s fair to say that Australia has stronger and less corrupt institutions.
AJR proposed that Australia became Australia because its terrain was reasonably hospitable to European colonizers, despite its abundance of sharks and spiders. They could and did move there in droves. They then had an incentive to create institutions that benefited white settlers.
In Nigeria, by contrast, a similar settlement project failed to take off as vast numbers of British settlers died from diseases such as malaria and yellow fever. Britain, which had relatively few white settlers, paid no attention to creating a fair system. Because they were essentially building institutions for Africans. And Britain cared far less about the welfare of blacks than it did whites.
Sure enough, AJR found that countries with higher mortality rates for European settlers during the colonial era have lower per capita incomes today, and their view is that this is determined by the type of institution. considered to be evidence of The following year’s almost equally famous essay, “Reversal of Fortune,” found that among the countries colonized by Europeans, the most successful in 1500 (with “success” measured by urbanization and population density) We found that there was an imbalance and expanded the discussion. I’m poor today.
AJR argued that these results defy geographical explanations and point to institutional changes brought about by European colonization.
There are many fascinating things about AJR’s worldview. Government agencies certainly seem important. There is no other reason why South Korea is one of the richest places on earth and North Korea is probably the poorest. This theory is hopeful. In other words, countries cannot change their geography, but they can adopt new and better institutions.
But are the specific empirical claims made by AJR valid? Apparently not. Economist David Albui dug into real data to provide the most convincing answer to his 2001 “Colonial Origins” paper. AJR used a sample of 64 countries, but had actual data for only 28 of them. The remaining 36 included data assigned based on “assumptions made by the authors about which countries have similar disease environments.”
As you can imagine, it is difficult to fabricate data on settler mortality in places where there is no data, and Albui found a serious flaw in AJR’s approach. For six countries, it was found that the estimates were “based on incorrect interpretations of the former colonial name of Mali.”
Looking at just 28 countries using non-synthetic data, there is no relationship between settler mortality and current economic outcomes. Worse, even the actual data tends to be about soldiers rather than civilian settlers, and soldiers are more likely to die from disease while actively fighting than civilians.
This biases the results in favor of AJR and makes the underlying relationship they posit (that places with higher mortality rates have developed worse institutions) much weaker.
Another answer by Ed Glaser, Rafael La Porta, Florencio López de Silanes, and Andrei Shleifer says that AJR data does not distinguish between institutional effects and human capital effects. , he pointed out. It included not only a more inclusive system, but also colonists who were generally much wealthier and better educated than the natives (at least from a modern capitalist perspective). Researchers have conducted their own tests and argue that human capital explains growth trajectories better than institutions. It’s not necessarily a darker story than AJR (countries can invest in schools to increase human capital), but different story.
Glazer and his friends. It also highlights problems with the measure of “expropriation risk” (the risk that the government will take all your belongings) used in AJR’s work. This is an important indicator for AJR of whether an institution is comprehensive or extractive, but it is only a subjective 0 to 10 rating system that AJR adopted from the private firm Political Risk Services, and it has major problems. It turned out that there was. “In 1984, the top 10 countries with the lowest expropriation risk included Singapore and the Soviet Union,” Glaser et al. Should you really believe that the risk of your belongings being taken away by the government in the Soviet Union is low?
AJR’s argument that 1,500 developed countries are today less developed, a “reversal of fortunes” occurring, similarly withered under scrutiny.
Arendam Chanda, C. Justin Cook, and Lewis Putterman have reevaluated this claim, but they are not just concerned with the geographic locations in which they lived, but with what happened to the actual descendants of the people in the 1500s. Evaluated. Comparing the Inca Empire to today’s Peru doesn’t exactly make sense, given the large-scale migrations of people from 1500 to the present day, and how vastly different each people was. Chanda et al. found that the fortunes were not reversed and persisted when demographic trends were taken into account. Descendants of countries that prospered in 1500 fared better in the 21st century. They conclude that this is evidence for Glaeser et al.’s contention that human capital, rather than institutions, is the important factor here.
Again, my conclusion here is not that “Nobel Prize-winning economists Acemoglu, Johnson, and Robinson are useless.” These were incredibly useful and greatly increased the prestige of these types of difficult economic history questions among economics professionals.
But their work also reminds us of the old academic cliché that you can learn something very small from something very big, or something very big from something very small. I think so. They were tackling a very big subject, and for a moment they seemed to understand something very big about it. However, upon inspection, it appears to be quite small.
