The Past Speaks

Brendan Greeley’s opinion piece in the Financial Times, “The Nobel for Econsplaining,” has sparked quite a bit of debate. Greeley’s writing is witty and engaging, and he clearly knows his stuff when it comes to econometric research methods, which makes his critique of economists’ work all the more credible.  Here is an example of his prose

Acemoglu and Robinson read a book called American Slavery, American Freedom, used the bits about American freedom and tossed the bits about American slavery. The new economic institutionalists treat work on institutions by a celebrated historian not as a coherent argument, but as a source of anecdotes. If they did this with data, you’d call it p-hacking.

However, I’m not totally convinced by his main argument. He suggests that understanding the history of slavery and race relations within the present-day United States and culturally proximate countries is key to seeing why Daron Acemoglu, Simon Johnson, and James Robinson (AJR) have produced an inaccurate theory about the relationship between political institutions and economic growth. The stakes in the debate about the accuracy of the AJR theory are high because it has massive normative implications: if their theory is true, then the case for Western countries promoting Western-style political style institutions around the world and for sending, say, more weapons to Ukraine, will be stronger than it would otherwise be.

Most of Greeley’s piece focuses on events in the British colonies in the New World and the historiographic debates around them. In trying to show what’s wrong with the AJR paradigm, he spends more time discussing a book by an American historian from 1975 than the incredible rise of the Chinese economy since 1978!!!  Greeley, being a US citizen who just happens to live in a region that once had African slavery (New Jersey), might be overestimating the importance of historical phenomena that are geographically close to him when evaluating AJR’s overall theory. I find that Greeley’s piece displays evidence of too many cognitive biases. In particular, the proximity bias is strong here. Maybe I’m guilty of recency bias in wanting us to focus our attention on China since 1978. I suppose we need to proper methodology to counteracting all of these biases so that we don’t end up cherry picking data.

Here is some background. As many readers of this blog will know, Daron Acemoglu, Simon Johnson, and James Robinson were awarded the 2024 Nobel Memorial Prize in Economic Sciences for their research on how political and economic institutions shape national prosperity. Their work, especially their theory of inclusive vs. extractive institutions, helps explain why some nations experience sustained economic growth while others remain poor. The award has been mostly well-received particularly by people in the centre of the Anglo-American political spectrum, highlighting the impact of their research on understanding global inequality, though some critics argue their theories overlook other factors like culture and geography. The critics come from various groups: academics in authoritarian yet economically successful regimes who don’t like the AJR insinuation that you need inclusive political institutions for prosperity, hard core left-wing critics who believe that it has already been proved that the West’s wealth is due to slavery and genocide, and then libertarians who think that AJR’s account is unduly celebratory of the mixed-economy arrangement that centrist academics tend to like.

AJR have faced heavy criticism from scholars who believe their work oversimplifies complex historical and economic processes, particularly in East Asia’s development and historical exploitation, such as slavery and colonialism. Austrian economists, people Pete Boettke and his colleagues at GMU, are also sceptical of their focus on state capacity, preferring more purely market-based explanations for economic development. The economists who were really vigorous critics of Covid lockdowns, US membership of NATO, and state intervention more generally tend to be the most sceptical of the AJR claim that England industrialized because it has the optimum blend of state and market. Seen from a sort of an-cap perspective, AJR sound like quasi-socialists.

In China, scholars have pointed out the tension between AJR’s emphasis on democratic governance and China’s authoritarian-led growth model. While their contributions are influential, the debate around their theories is shaped by ideological and geopolitical considerations.

AJR’s theory of inclusive political institutions, as detailed in works like Why Nations Fail (2012) and then their more recent book The Narrow Corridor argues that inclusive institutions—those allowing broad participation in political and economic processes—are key drivers of economic development. They contrast these with extractive institutions, where political power and economic benefits are concentrated in the hands of a few (think of Stalinism, feudalism, or the antebellum American South), which they argue stifle growth and innovation. They present historical evidence from various contexts to support this theory, emphasizing how colonial legacies, institutional arrangements, and power structures shaped different nations’ development trajectories.

Image from The Narrow Corridor

Critics argue that the rapid economic development of East Asian economies, such as South Korea, Taiwan, and above all mainland China, disproves AJR’s claim that you need inclusive institutions (basically democracy) for economic growth. These countries didn’t have fully inclusive political systems during their early development stages. Instead, they relied on strong, centralized, and often authoritarian governments to implement land reforms, industrial policies, and export-oriented strategies. In South Korea, this is more of an academic question, since the country transitioned to democracy around 1988 and has continued to develop since then. Everyone in South Korea now regards democracy there as normative.  In mainland China, however, the claim that you need inclusive political institutions for economic growth is provocative and highly threatening to the existing political system.  I find it strange that Greely says so little about China in his piece, as that’s the real Achilles heel of the AJR theory, not something that happened in Virginia in the 1600s.

Some scholars who fall into the camp of domestic British and American progressives argue that AJR downplay the role of slavery and other forms of coercive labour and land theft in the rise of Western economies. According to these people, we already know that the transatlantic slave trade, colonial resource exploitation, and forced labour were absolutely essential to Western Europe’s wealth accumulation, which fuelled industrialization. (Somehow these critics don’t explain why England and the Netherlands developed at a much faster rate that Portugal and Spain). Anyway, these critics suggest that economic growth can occur in contexts where extractive institutions play a significant role, contradicting the idea that inclusive institutions are always necessary for development.

The debate over AJR’s theory is deeply influenced by political ideology and geopolitics. I wish Brendan had said more about that factor and then about his own ideological commitments.

Here is Brendan’s brief biography:

Brendan comes to Princeton after 20 years as a journalist, covering economic and monetary policy. He was the US economics editor at the Financial Times, and continues to write a regular column there. Before that, he was a staff writer for Bloomberg Businessweek and The Economist, as well as an anchor and correspondent for Bloomberg TV. He has also written for the New York Times, the New York Times Magazine and the Wall Street Journal Europe, and received a New York Press Club Award for special event reporting in 2012. Brendan graduated from Tulane University with honors in German in 1997. 

I would note here that Tulane, where Brendan did his undergrad, is in a part of the US where the legacy of slavery is visible all around you. That fact and other autobiographical should perhaps have been disclosed here.

References

Acemoglu, D., Johnson, S., & Robinson, J. (2002). Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution. The Quarterly Journal of Economics, 117(4), 1231-1294.

Acemoglu, D., & Robinson, J. A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Business.

Boettke, P. J., Coyne, C. J., & Leeson, P. T. (2008). Institutional Stickiness and the New Development Economics. The American Journal of Economics and Sociology, 67(2), 331-358.

Chang, H.-J. (2002). Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press.

 Inikori, J. E. (2002). Africans and the Industrial Revolution in England: A Study in International Trade and Economic Development. Cambridge University Press.

Wolfe, P. (2006). Settler Colonialism and the Elimination of the Native. Journal of Genocide Research, 8(4), 387-409.

Yao, Y. (2011). The End of the Beijing Consensus. Foreign Affairs, 90(6), 13-18.