Nobel Prize in Economics 2024: Institutions and the Wealth of Nations

This note covers the Nobel Prize in Economics 2024: who won it, what the official citation means, how colonial history was used to test whether institutions cause prosperity, how settler mortality and the "reversal of fortune" pattern work, how the laureates explain why bad institutions persist and when democratisation happens, how the research unfolded, why it matters and quick facts for exams.

What was the Nobel Prize in Economics 2024 awarded for?

The official citation for the prize reads: "for studies of how institutions are formed and affect prosperity." This citation was shared equally by three laureates.

In plain words, the three laureates showed that the biggest reason some countries are rich and others are poor is not climate, culture or luck but the type of institutions a society has, meaning its laws, rules and systems of government.

Societies with inclusive institutions (secure property rights, fair courts, and government accountable to citizens through elections) tend to grow prosperous over the long run.

Societies with extractive institutions (where a small ruling group controls the economy and the political system for its own benefit) tend to stay poor.

The laureates proved this using historical evidence from European colonisation, and then built mathematical models explaining why such institutions, once set up, are so hard to change.

The prize's official name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, widely called the Nobel Prize in Economics. It is awarded by the Royal Swedish Academy of Sciences, on the recommendation of its Committee for the Prize in Economic Sciences.

Who are the laureates?

Daron Acemoglu

Daron Acemoglu was born on 3 September 1967 in Istanbul, Turkey. At the time of the award he was affiliated with the Massachusetts Institute of Technology (MIT), Cambridge, MA, USA. He received one third of the prize.

He completed his PhD in 1992 at the London School of Economics and Political Science, and co-authored, with Johnson and Robinson, the papers that used colonial history as a natural experiment to test whether institutions cause prosperity, and worked with Robinson on the game-theoretic models of why institutions persist or change.

Simon Johnson

Simon Henry Roberts Johnson, known as Simon Johnson, was born in 1963 in Sheffield, United Kingdom. His affiliation at the time of the award was also Massachusetts Institute of Technology (MIT), Cambridge, MA, USA.

He received one third of the prize. He completed his PhD in 1989 at MIT, and was a co-author, with Acemoglu and Robinson, of the papers that used European settler mortality data to link colonial institutions statistically to present-day prosperity.

James A. Robinson

James A. Robinson was born in 1960. At the time of the award he was affiliated with the University of Chicago, Chicago, IL, USA. He received one third of the prize.

He completed his PhD in 1993 at Yale University, and worked with Acemoglu on the theoretical framework explaining the commitment problem that keeps extractive institutions in place and the conditions under which societies democratise.

What problem were the laureates trying to solve?

The starting puzzle is stark: today's richest countries, taken as a group, have roughly thirty times the income of today's poorest countries, and this gap has not closed even though poor countries have grown a little richer.

Standard growth theory predicts that poor countries should gradually catch up with rich ones, but in reality this convergence does not happen.

Economists had long suspected that institutions, meaning the rules, both formal and informal, that govern political and economic life, were a fundamental cause of this gap.

Earlier scholars such as 1993 Economics laureate Douglass North had argued that institutions are the "rules of the game" shaping incentives for investment and exchange.

But proving that institutions actually cause prosperity, rather than simply resulting from it, is very hard.

Rich and poor countries differ in many ways at once, so a simple correlation between good institutions and high income does not tell us which one causes the other.

It is also possible that prosperity itself leads societies to build better institutions, reversing the direction of causation.

The laureates' breakthrough was to find a natural experiment: the European colonisation of large parts of the globe from the sixteenth century onwards.

Because colonisers set up very different institutions in different colonies, depending on local conditions that had nothing to do with those colonies' later economic performance, the colonial era offered a way to isolate the effect of institutions from other confounding factors.

How did the laureates use colonisation as a natural experiment?

When Europeans colonised a territory, they had to choose what kind of institutions to set up.

The Nobel committee noted that in some colonies, colonisers set out to take over the land and labour of the indigenous population for their own benefit, while in others they set up inclusive political and economic systems meant to benefit European settlers over the long run.

The laureates argued that this choice depended heavily on two linked initial conditions, which in turn determined whether colonisers built inclusive or extractive institutions:

1. How large and dense the local population was: a bigger population meant more resistance to conquest but also a bigger pool of cheap labour to exploit once subdued.
2. How attractive or dangerous the area was for European settlers themselves, driven largely by the local disease environment.
3. Where many Europeans chose to settle permanently, colonisers built institutions protecting their own property rights and political voice, producing more inclusive systems.
4. Where few Europeans settled, because of disease or dense hostile populations, colonisers instead built or kept extractive institutions purely to pull out resources.

A key part of their method used settler mortality data, drawn largely from historical records compiled by earlier researchers on deaths among European soldiers, sailors and clergy stationed in different colonies.

Because this mortality mainly reflected disease exposure rather than the area's later economic prospects, it worked as a plausible independent ("quasi-experimental") measure to trace how institutions were set up and how they still shape outcomes today.

Draw a scatter plot with the natural log of historical settler mortality on the horizontal axis and the natural log of present-day GDP per person on the vertical axis, for former European colonies.

Mark a downward-sloping line showing that colonies where European settlers died at higher rates have much lower income today.

What is the "reversal of fortune" pattern?

One of the laureates' most striking findings is called the reversal of fortune. They measured prosperity around the year 1500, before most colonisation began, using proxies such as how urbanised and densely populated a region was (since only areas with productive agriculture and transport networks could support large cities).

They then compared this to GDP per person roughly five centuries later, and found a clear negative relationship: territories that were relatively rich and densely populated in 1500 tend to be relatively poor today, and territories that were poor and sparsely populated in 1500 tend to be relatively rich today.

The committee's popular science account explains the mechanism with the divided city of Nogales, split by a fence between Arizona in the USA and Sonora in Mexico.

The two halves share climate, ancestry and culture, yet the US side has secure property rights and free elections to remove unsatisfactory politicians, while the Mexican side has had more corruption and organised crime making business risky.

The Nobel committee's popular account states this divided city is "not an exception" but part of a wider pattern rooted in colonial institutions.

Why do bad institutions persist, and when do societies change them?

If extractive institutions are so economically wasteful, why don't ruling elites simply switch to better ones that would make everyone richer in the long run? The laureates' theoretical work answers this with what they call the commitment problem.

A ruling elite that benefits from extractive institutions might promise reforms to calm the population, but the population has no way to trust that promise.

Once calm returns, the elite has every incentive to break its word and go back to extracting resources, because the political system still leaves it in control.

Since the population cannot enforce the promise, they do not believe it, and so the reform never credibly happens through promises alone.

The laureates showed, however, that this same commitment problem can also explain why democratisation sometimes does occur.

When the threat of revolution becomes serious enough, elites face a dilemma: they would rather stay in power and offer reforms, but the population will not believe mere promises.

The only credible way to satisfy the population is for the elite to actually hand over political power, for example by extending the right to vote.

The Nobel committee's popular science account described the laureates' theoretical framework for institutional change as having three main components, with a further point describing their consequence:

1. A conflict between the elite and the masses over how resources and decision-making power are distributed.
2. The ability of the masses to exercise power outside formal channels, by mobilising and threatening the ruling elite with revolution.
3. The commitment problem, meaning elites cannot credibly promise future reforms while they still hold full power.
4. Given these three elements, the elite's only credible option, once a revolutionary threat is serious, is to transfer actual decision-making power to the population.

Draw a simple flow chart: ruling elite holds power and extractive institutions → threat of revolution grows → elite tries to promise reform → population distrusts the promise because elite still controls the system → elite extends the franchise to make the reform credible → more inclusive institutions result.

The committee noted this model has been used to explain democratisation in Western Europe at the end of the nineteenth and start of the twentieth century.

In Great Britain, voting rights were expanded in stages, each preceded by strikes and protests, because the elite could not credibly meet the threat with promises alone.

In Sweden, the decision for general suffrage in December 1918 followed extensive unrest connected to the Russian revolution.

How did the laureates' research unfold?

Why does this discovery matter?

The Nobel committee said the laureates' work matters because reducing the enormous income gap between rich and poor countries is "one of our time's greatest challenges," in the words attributed to Jakob Svensson, Chair of the Committee for the Prize in Economic Sciences, and the laureates demonstrated the importance of institutions for meeting it.

The research reshaped how economists think about long-run growth: instead of focusing only on immediate drivers like savings rates or investment, it pointed attention to fundamental causes, namely the political and economic rules a society lives under.

It also launched a large field of research on historical persistence, studying how colonial-era decisions about land rights, infrastructure or borders continue to shape outcomes today.

The committee's background material also noted practical links to development policy, pointing out that major international reports have emphasised building "capable, accountable, and inclusive institutions" as central to reducing poverty.

The work also carries clear relevance for understanding threats to democracy, since the same theory helps explain both why authoritarian systems persist and under what pressures they give way to more open ones.

Open questions remain about exactly how large the causal effect of institutions is compared with other factors such as human capital that settlers may also have brought with them, a concern later researchers raised and the original laureates addressed but did not fully settle.

How does this connect to what you study?

If you study civics or political science, this prize connects directly to ideas about the rule of law, property rights and why constitutions limit the power of rulers. The laureates' research treats institutions, both economic and political, as the deep cause of how prosperous or poor a society becomes.

The laureates' work on the commitment problem helps explain why written guarantees, such as an independent judiciary or regular elections, matter more than verbal promises from those in power. A ruling elite that still controls the political system cannot credibly promise reform, because nothing stops it from breaking that promise once unrest dies down. This is why constitutional limits, not just good intentions, are needed to protect citizens.

If you study economics, the work connects to growth theory and the puzzle of why some nations converge in income while others do not. Standard models predict poor countries should catch up with rich ones over time, but the laureates showed that differences in institutions, inherited from history, help explain why this catching-up often fails to happen.

It also gives a concrete, historically grounded example of how economists try to establish cause and effect using natural experiments, such as settler mortality during colonisation, rather than relying only on correlations between institutions and income. This method of using historical conditions unrelated to later outcomes, to isolate a causal relationship, is now widely used across economics and political science research.

Quick facts for exams

The Nobel Prize in Economics 2024, formally the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was awarded jointly to Daron Acemoglu, Simon Johnson and James A. Robinson, each receiving one third of the prize.

The Royal Swedish Academy of Sciences announced the award on 14 October 2024 "for studies of how institutions are formed and affect prosperity." The laureates used European colonisation as a natural experiment to show that inclusive institutions promote long-run prosperity while extractive institutions keep societies poor, documented the "reversal of fortune" pattern, and built theoretical models of the commitment problem explaining why bad institutions persist and when democratisation happens.

The prize carried a total amount of 11,000,000 Swedish kronor, shared equally.

Note: Source. The prize facts in this note are from the Nobel Prize's official site, nobelprize.org.

Glossary

• Institution — the formal and informal rules that shape political and economic behaviour in a society, such as property law or voting rights.
• Inclusive institutions — political and economic systems that protect property rights and political voice for a broad section of the population.
• Extractive institutions — systems designed mainly to let a small elite extract resources and wealth from the wider population.
• Natural experiment — a real-world situation that mimics a controlled experiment, letting researchers compare outcomes without the researcher designing the intervention.
• Settler mortality — historical death rates among European colonisers, soldiers, sailors and clergy in a given colony.
• Reversal of fortune — the pattern in which regions relatively rich before colonisation became relatively poor afterwards, and vice versa.
• Commitment problem — the difficulty a ruling group has in making believable promises of future reform while it still holds all the power.
• Revolutionary threat — the risk that the population will mobilise against the ruling elite, used in the model as a force that can push elites to share power.
• Franchise — the legal right to vote in elections; extending it was one way elites credibly shared power.
• GDP per capita — total economic output of a country divided by its population, a common measure of average prosperity.
• Quasi-experimental approach — a research design using naturally occurring variation, rather than a lab experiment, to test cause and effect.
• Modernization theory — an older theory holding that economic development automatically brings democratisation, which the laureates' work weakened.

Common errors and misconceptions

• Misconception: The prize says poor countries are poor mainly because of climate or geography. Correct: The laureates found that institutions, not climate alone, are the key driver, since a pure geography story cannot explain the reversal of fortune.
• Misconception: All three laureates worked at the same institution. Correct: Acemoglu and Johnson were at MIT, while Robinson was at the University of Chicago at the time of the award.
• Misconception: "Reversal of fortune" means the original native populations of poor areas became individually wealthy. Correct: It describes a shift in relative national prosperity rankings; the Nobel background material notes much of the original native population did not survive colonisation in the sparsely populated, now-rich areas.
• Misconception: The research proves institutions are the only cause of prosperity differences. Correct: The committee's material notes the exact size of the institutional effect is difficult to quantify precisely, and other factors such as human capital were also debated.
• Misconception: Democratisation happens automatically once a country becomes richer. Correct: The laureates' work challenged this "modernization theory" view, showing democratisation is instead often driven by the threat of revolution and the commitment problem.
• Misconception: Extractive institutions always collapse quickly because they are inefficient. Correct: The committee explained that extractive institutions can persist for a long time because they provide short-term gains to those in power, even though they are inefficient for society as a whole.
• Misconception: The prize is a political judgement praising or blaming particular modern governments. Correct: The citation and committee statements describe a general theory of institutions and prosperity, illustrated mainly through historical colonial examples.

Exam-style questions with model answers

Q1. State the official citation for the Nobel Prize in Economics 2024. [1 mark]

1. The citation reads "for studies of how institutions are formed and affect prosperity," awarded jointly to Daron Acemoglu, Simon Johnson and James A. Robinson.

Q2. Name the three laureates and their affiliations at the time of the award. [2 marks]

1. Daron Acemoglu and Simon Johnson were both at the Massachusetts Institute of Technology (MIT), Cambridge, USA, while James A. Robinson was at the University of Chicago, USA. Each received one third of the prize.

Q3. What is meant by "inclusive" and "extractive" institutions? [3 marks]

1. Inclusive institutions protect property rights and political voice broadly across a population, giving people incentives to invest and participate in the economy. Extractive institutions instead let a narrow ruling elite control the economy and political system, extracting wealth from the wider population without broad protection of rights. The laureates argued the former type of institution promotes long-run prosperity, while the latter traps societies in poverty.

Q4. Explain how the laureates used European colonisation as a natural experiment. [4 marks]

1. The laureates noted that European colonisers set up very different institutions in different colonies depending on local conditions, such as the local disease environment and the size of the indigenous population, factors unrelated to later economic prospects. Where settlers faced low mortality, they settled in large numbers and built inclusive institutions protecting their own interests. Where mortality was high, colonisers stayed few and built extractive institutions purely to pull out resources. Because the initial conditions were essentially independent of future economic outcomes, comparing colonies with different settler mortality let the researchers estimate the true effect of institutions on long-run prosperity, rather than just a correlation.

Q5. What is the "commitment problem" and why does it matter for institutional change? [4 marks]

1. The commitment problem is the difficulty a ruling elite has in credibly promising future reforms while it still holds full political power, since the population knows the elite can break such promises once calm returns. This explains why extractive institutions persist even when everyone could gain from reform. The laureates showed this same problem can also explain democratisation: when facing a serious revolutionary threat, the elite's promises alone will not be believed, so the only credible way to satisfy the population is to actually hand over political power, for example by extending voting rights.

Q6. Describe the "reversal of fortune" pattern found by the laureates, with the evidence used to support it. [5 marks]

1. The laureates measured prosperity in 1500, before most colonisation, using proxies such as urbanisation and population density, and compared it to GDP per person about five centuries later. They found that regions relatively rich and densely populated in 1500 are now relatively poor, while regions that were poor and sparsely populated are now relatively rich, a pattern they called the reversal of fortune. This reversal was not found in non-colonised parts of the world, and no similar reversal appeared during the five centuries before colonisation began, strengthening the case that European colonisation itself caused the switch. The committee's background material also linked the reversal to the timing of the industrial revolution, when new technologies and opportunities became available mainly to regions with inclusive institutions, letting formerly poor colonies overtake formerly rich ones.

Q7. Discuss, using the example of Nogales, how the laureates' research connects institutions to living standards. [5 marks]

1. Nogales is a single city split by a border fence between Arizona in the USA and Sonora in Mexico. The two halves share the same geography, climate, historical population and culture, yet living standards differ sharply: the US side has secure property rights, longer average lifespans, high school completion and free elections allowing residents to remove unsatisfactory politicians. The Mexican side, while relatively prosperous within Mexico, has had corrupt politicians who are harder to remove and organised crime that makes running a business riskier. The Nobel committee's popular account states that since geography and culture cannot explain this gap, the decisive difference is institutions, with the divided city described as part of a clear pattern tracing back to the different colonial institutions established in the Spanish territory that became Mexico and the British territory that became the USA.

Key takeaways

• The 2024 Economics prize went jointly to Daron Acemoglu, Simon Johnson and James A. Robinson "for studies of how institutions are formed and affect prosperity."
• The laureates used European colonisation as a natural experiment to show that institutions, not geography or culture alone, drive long-run national prosperity.
• Inclusive institutions protect broad property rights and political voice; extractive institutions let a narrow elite extract wealth from the population.
• The "reversal of fortune" shows regions relatively rich in 1500 are often relatively poor today, and vice versa, among former colonies.
• Settler mortality data linked colonial conditions to the type of institutions established, and those institutions persisted into the present.
• The commitment problem explains why ruling elites cannot credibly promise reform while still holding power, so extractive institutions persist.
• The same commitment problem can explain democratisation, since only transferring real political power, such as the franchise, is a credible response to revolutionary threats.
• The model has been applied to real historical cases, including franchise extension in Britain and the 1918 adoption of general suffrage in Sweden.

Test yourself

What is the official full name of the economics prize?

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, widely called the Nobel Prize in Economics.

How much of the prize did each laureate receive?

Each of the three laureates, Daron Acemoglu, Simon Johnson and James A. Robinson, received one third of the prize.

What historical event did the laureates use as a natural experiment?

They used the European colonisation of large parts of the globe, starting in the sixteenth century, which set up very different institutions across colonies.

What does "extractive institutions" mean?

Institutions that let a narrow ruling elite extract wealth and resources from the wider population, without broad protection of property rights.

What is the "reversal of fortune"?

The pattern where territories relatively rich and densely populated in 1500 later became relatively poor, and vice versa, among former European colonies.

Why do extractive institutions persist even though they are inefficient?

Because the commitment problem means the ruling elite cannot credibly promise future reform while still holding power, so the population does not trust reform promises.

What event in Sweden did the presentation speech link to the laureates' theory?

The December 1918 parliamentary decision granting general and female suffrage, taken under threat of revolution following unrest after the Russian revolution.

When was the 2024 Economics prize announced, and by whom?

It was announced on 14 October 2024 by the Royal Swedish Academy of Sciences.