Why some economists are skeptical of this year’s Nobelists

D Nobel Prize in Economics Awarding Darron Acemoglu, Simon Johnson and James Robinson this week made a lot of people feel like winners. (Especially to those in the know who refer to the group by the acronym “AJR”)

The general public wins in that all three, unusually for academic economists, have been written extensively for general audiences; Acemoglu and Robinson’s 2012 book Why nations fail Johnson has been a bestseller and has several prominent books Financial control And innovation. Economic historians won out, with Acemoglu, Johnson and Robinson’s most famous works being historical. Development process in former colony. The left wins, of which Acemoglu has become a vocal proponent of late Employee Empowerment Policy and “contemplated its possibilitiesAI-enabled communism“

That, you don’t get 4,400 quotes Without earning some critics. The fairest knock against all three is that while their theories are elegant, the data underlying them are shaky at best and the results bear no scrutiny.

It is not as terrible as it may sound. All science progresses through new discoveries that later reverse themselves. I think Acemoglu, Johnson and Robinson are great economists and even flawed empirical findings can be important in advancing a field. Physicist JJ Thomson — another Nobel laureate — famously and wrongly Recommended That atom lacked a nucleus, but that didn’t make his earlier discovery of the electron any less important.

But this week, with considerable and mostly uncritical public attention on the work of Nobel laureates, I think it’s important to talk about its flaws and subject results as influential as they are to further examination.

AJR for beginners

AJR’s most famous intervention was one of economics’ longest-running debates: Why are some nations so rich and others so poor?

The collaborators sought to refute geographers (notably Jared Diamond) who argued that land features were responsible for Europe being richer than Africa. AJR’s answer was that some countries had better, more “inclusive” institutions that allowed the fruits of economic growth to be widely shared, while others had “extractive” institutions where a small cabal could capture all the profits. The former increases in the long run; The latter does not.

Their most famous paper, “Colonial Origins of Comparative Development: An Empirical Investigation,” sought to measure the effects of inclusive versus extractive institutions. To do this, they had to find factors that led to specific types of institutions in certain areas, but that were not otherwise connected to their economic development. In econometrics these are called “instrumental variables,” and the theory is that controlling for such variables allows you to isolate the causal effect of the independent variable (in this case, the type of organization) you’re studying.

Their instrument was “how often European settlers died.” Think Australia on one side and Nigeria on the other. Both were colonies of the United Kingdom; Australia has, I think it’s fair to say, Stronger, less corrupt institutions.

What AJR proposed was that Australia became Australia because it was a reasonably hospitable terrain for European colonists, despite the many sharks and spiders; They could and did migrate there in large numbers. They then had an incentive to build institutions that benefited white settlers.

In Nigeria, by contrast, diseases such as malaria and yellow fever killed A large number of British settlers, so a similar settlement project could not get off the ground. With relatively few white settlers, the British made no concessions about building fair institutions, because they effectively built them for Africans—and the British cared less about the welfare of black people than whites.

Certainly, AJR found that countries with high European settler mortality rates during colonialism have lower per capita incomes today, which they see as evidence for their view that the type of institution is the determinant. The following year an almost famous paper, “A reversal of fortune“Extends the argument, finding that among the countries colonized by Europeans, those that were most successful in 1500 (where “success” is measured by urbanization or population density) are disproportionately poorer today.

These findings point against a geographical explanation, AJR argued, and toward institutional change brought about by European colonization.

Why is the search shaky?

There is much that is interesting about the AJR worldview. Government institutions seem important; South Korea has no other reasonable cause One of the richest places On earth and in North Korea Probably the poorest. The theory is a promising one: Although countries cannot change their geography, they can adopt new, better institutions.

But what specific empirical claims does AJR make? It doesn’t seem like it. Economist David Alboy suggests this Most persuasive answer Digging up the actual facts in their 2001 “Colonial Origins” paper. AJR used a sample of 64 countries, but only had actual data for 28 of them. Another 36 had data that were assigned based on “the authors’ assumption that countries have similar disease environments.”

As you might expect, generating settler mortality data for places where we have no data is difficult, and Alboy finds serious flaws in how AJR does it; For six countries, he found, their assumptions were “based on misinterpretations of Mali’s former colonial name.”

Once you look at the 28 countries with non-synthetic data, there is no correlation between settler mortality rates and current-day economic outcomes. Worse, even the original data tends to be about soldiers and soldiers rather than civilian settlers More likely to die from disease when compared to civilians actively fighting.

This biases the results in favor of AJR, and weakens the underlying relationship they hold (worse institutions develop where mortality is high).

Another answerEd Glaeser, Rafael La Porta, Florencio López de Silanes, and Andrei Shleifer note that AJR’s data do not distinguish between institution effects and human capital effects: settler colonies such as Australia and Canada simply did not include more. institutions, but settlers who were generally wealthier and better-educated (at least from a modern capitalist vantage point) than the native inhabitants. The researchers conducted their own experiments and argued that human capital does a better job of explaining growth trajectories than firms. This does not necessarily make for a worse story than AJR (countries can invest in schools and increase human capital), but it is a different the story

Glaser and co. AJR’s work also highlights the problems of measuring “takeover risk” (the risk that the government takes all your stuff). This is an important indicator for AJR of whether institutions are inclusive or extractive, but it appears to be only a subjective 0 to 10 rating system AJR took from the private firm Political Risk Services and has a huge problem. “In 1984, the top ten countries with the lowest confiscation risk included Singapore and the USSR,” Glaser et al note. Do we really want to believe that in the Soviet Union there was little risk of the government taking your stuff?

AJR’s claim of a “reversal of fortunes,” leading nations of the 1500s today to retreat, similarly withers under scrutiny.

Arendam Chand, C. Justin Cook, and Louis Putterman Claim reassessment But what’s measured is what happened to the descendants of those actual 1500s people, not just the geographic location where they lived. There have been massive movements of people from 1500 to the present, and comparing the Incan Empire to today’s Peru is not strictly speaking because of how different the people of each were. Chand et al find that fortunes haven’t reversed, but remain constant when you account for population movements: People from countries that prospered in 1500 are doing better in the 21st century. This is evidence, they conclude, that Glaser et al. claim that human capital rather than institutions is the important factor here.

Again, my takeaway here is not “Acemoglu, Johnson and Robinson, the Nobel-winning economists, are useless.” They are incredibly useful, and greatly expand the prestige of such difficult economic history questions within the economics profession.

But I also think their work is a reminder of the old academic cliché that you can either learn something very small about something very big, or learn something very big about something very small. They were dealing with a very big issue, and it seemed for a second to understand something very big about it. Upon inspection, though, it looks much smaller.

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