(2) A Nobel for the big big questions - by Noah Smith - 0 views
www.noahpinion.blog/...obel-for-the-big-big-questions
nobel economics development institutions macroeconomics culture politics history policy

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What’s an “institution”? No one can quite agree on that point. Conceptually, they could include legal arrangements like property rights, political systems like democracy, bureaucratic organizations, etc. Different researchers tend to mean different things when they say “institutions”, though everyone seems to agree that 1) rule of law, and 2) property rights are important examples.
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“AJR”) have a theory that economic development is caused by a country having the right kind of institutions.
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they believe that if institutions are “inclusive” — if they “allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish” — then a country will prosper
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And if institutions are “extractive” — if they ignore human input, waste human potential, and just try to grab resources like free labor or minerals — then a country will stay poor.
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In fact, I love this theory. It resonates strongly on an emotional level, because it agrees strongly with my values. I believe in regular people
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we confirm a reversal of fortune for colonized countries as territories, but find persistence of fortune for people and their descendants. Persistence results are at least as strong for three alternative measures of early development, for which reversal for territories, however, fails to hold. Additional exercises lend support to Glaeser et al.'s (2004) view that human capital is a more fundamental channel of influence of precolonial conditions on modern development than is quality of institutions.
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Having said all that, though, I don’t think this is the kind of theory you can easily evaluate with evidence. And I don’t find the evidence that Acemoglu, Johnson, and Robinson have produced to test the institutional theory of development to be extremely persuasive.
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AJR’s argument here is that because the rich and poor places flipped places between 1500 and 1995 — as demonstrated by that downward-sloping line — it must mean that geography can’t explain wealth and poverty. Instead it must be institutions.
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t Chanda, Cook, and Putterman (2014) did this exercise rigorously, and found that, lo and behold, once you account for population relocations, AJR’s “reversal of fortune” gets reversed:
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I really like the answers AJR came up with, and I think there’s a decent chance they’re actually true.
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It’s just inherently very very hard to look at the history of countries 500 years ago and draw strong empirical conclusions about the deep fundamental causes of economic development. That is, inherently, an incredibly difficult exercise.
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those are only the two most famous papers in a long series of papers in which AJR (or sometimes just AR, or sometimes just Acemoglu) attempt to theorize how institutions affect growth — basically, political science theories about the relationship between elites and the masses.
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without solid empirical confirmation that institutions really do affect growth in the way that AJR hypothesize — confirmation that may simply be impossible to get — there’s always the chance that those theories are “explaining” a phenomenon that doesn’t actually exist.
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The same issue crops up regarding Acemoglu and Robinson’s recent work with Suresh Naidu and Pascual Restrepo on the impact of democracy on growth. The paper is entitled “Democracy Does Cause Growth”, but as Alex Tabarrok notes, the effect they find is actually pretty small:
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In other words, if the average nondemocracy in their sample had transitioned to a democracy its GDP per capita would have increased from $2074 to $2489 in 25 years (i.e. this is the causal effect of democracy, ignoring other factors changing over time). Twenty percent is better than nothing and better than dictatorship but it’s weak tea.
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If Park is right, then the economic benefits of democracy are simply an accident of the last few decades of history, in which the U.S. and its allies happened to be very powerful and used their power to put their thumb on the economic scales a bit.
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the point is that the entire literature is filled with things like this. Cross-country regressions are inherently limited tools for explaining the wealth and poverty of nations. The kind of questions AJR purport to answer may never really be answerable,
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Once again, “Europeans implementing good institutions” is just impossible to distinguish empirically from “Europeans moving in.”
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But I also don’t think every interesting line of research needs a Nobel Prize. I was happy to see the Econ Nobel move toward rewarding research that was more scientific and less philosophical than in the past. It was part of econ’s general trend toward being a more humble, grounded, reliable, applicable science. This year’s award moves in the opposite direction, back toward philosophical big-think.