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By Renaud Foucart, Lancaster University 

This year’s Nobel memorial prize in economics has gone to Daron Acemoglu and Simon Johnson of the Massachusetts Institute of Technology and James Robinson of the University of Chicago for their work on why there are such vast differences in prosperity between nations.

While announcing the award, Jakob Svensson, the chairman of the economics prize committee, said: “Reducing the huge differences in income between countries is one of our times’ greatest challenges”. The economists’ “groundbreaking research” has given us a “much deeper understanding of the root causes of why countries fail or succeed.”

The award, which was established several decades after the original Nobel prizes in the 1960s, is technically known as the Sveriges Riksbank prize in economic sciences. The academics will share the award and its 11 million kroner (£810,000) cash prize.

To explain their work and why it matters, we talked to Renaud Foucart, a senior lecturer in economics at Lancaster University in the UK.

What did Daron Acemoglu, Simon Johnson and James Robinson win for?

The three academics won the prize mostly for providing causal evidence of the influence of the quality of a country’s institutions on its economic prosperity.

At first glance, this may seem like reinventing the wheel. Most people would agree that a country that enforces property rights, limits corruption, and protects both the rule of law and the balance of power, will also be more successful at encouraging its citizens to create wealth, and be better at redistributing it.

But anyone following the news in Turkey, Hungary, the US or even the UK, will be aware that not everyone agrees. In Hungary for instance, cases of corruption, nepotism, a lack of media pluralism, and threats to the independence of the judiciary have led to a fierce battle with the European Union.

Rich countries typically have strong institutions. But several (wannabe) leaders are perfectly comfortable with weakening the rule of law. They do not seem to see institutions as the cause of their prosperity, just as something that happens to be correlated.

In their view, why does the quality of institutions vary across countries?

Their work starts with something that has clearly not had a direct effect on today’s economic prosperity: living conditions at the start of European colonialism in the 14th century. Their hypothesis is that, the richer and the more inhospitable to outsiders a place was, the more colonial powers were interested in brutally stealing the country’s riches.

In that case, they built institutions without any regard for the people living there. This led to low quality institutions during the colonial period, that continued through independence and led to bad economic conditions today.

All of this is because – and this is another domain to which this year’s laureates contributed – institutions create the conditions of their own persistence.

In contrast, in more hospitable and less developed places, colonialists did not take resources. They instead settled and tried to create wealth. So, it was in their (selfish) interest to build democratic institutions that benefited people living there.

The researchers then tested their hypothesis by looking at historical data. First, they found a “great reversal” of fortune. Places that were the most urbanised and densely populated in 1500 became the poorest by 1995. Second, they found that places where settlers died quickly from disease and could therefore not stay – while local populations were mostly immune – are also poorer today.

Looking at the colonial roots of institutions is an attempt to disentangle causes and consequences. It is also perhaps the main reason why the committee would say that even if this year’s laureates did not invent the idea that institutions matter, their contribution is worthy of the highest distinction.

Some have suggested the work simply argues ‘democracy means economic growth’. Is this true?

Not in a vacuum. For instance, their work does not tell us that imposing democracy from scratch on a country with otherwise malfunctioning institutions will work. There is no reason for a democratic leader not to become corrupt.

Institutions are a package. And this is why it is so important to preserve their different aspects today. Weakening even a little bit of the protections the state offers to citizens, workers, entrepreneurs and investors may then lead to a vicious circle where people do not feel safe that they will be defended against corruption or expropriation. And this leads to lower prosperity and more calls for authoritarian rules.

There may also be outliers. China is clearly trying to push the idea that capitalism without a liberal democracy can be compatible with economic success.

The growth of China since Deng Xiaoping’s reforms in the 1980s coincides with the introduction of stronger property rights for entrepreneurs and businesses. And, in that sense, it is a textbook version of the power of institutions.

But it is also true that Deng Xiaoping ordered the crushing by the military of the Tiananmen Square protests for democracy in 1989. China today also has a clearly more authoritarian system than western democracies.

And China is still much poorer than its democratic counterparts, despite being the world’s second-largest economy. China’s GDP per capita is not even a fifth of that of the US, and it is facing major economic challenges of its own.

Actually, according to Acemoglu, Xi Jinping’s increasingly authoritarian regime is the reason why China’s economy is “rotting from the head”.

What trajectory are democratic institutions throughout the world currently on?

Acemoglu has expressed concern that democratic institutions in the US and Europe are losing support from the population. And, indeed, many democracies do seem to be doubting the importance of protecting their institutions.

They flirt with giving more power to demagogues who claim it is possible to be successful without a strong set of rules that bind the hands of the rulers. I doubt today’s prize will have the slightest influence on them.

But if there is one message to take home from the work of this year’s laureates, it is that voters should be cautious not to throw the baby of economic prosperity with the bathwater of the sometimes frustrating rules that sustain it.

About the Author:

Renaud Foucart, Senior Lecturer in Economics, Lancaster University Management School, Lancaster University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By John Hawkins, University of Canberra

The 2024 Nobel Prize in Economics has been awarded to three US-based economists who examined the advantages of democracy and the rule of law, and why they are strong in some countries and not others.

Daron Acemoglu, Simon Johnson and James A. Robinson.
Nobel Prize Outreach

Daron Acemoglu is a Turkish-American economist at the Massachusetts Institute of Technology, Simon Johnson is a British economist at the Massachusetts Institute of Technology and James Robinson is a British-American economist at the University of Chicago.

The citation awards the prize “for studies of how institutions are formed and affect prosperity”, making it an award for research into politics and sociology as much as economics.

At a time when democracy appears to be losing support, the Nobel committee has rewarded work that demonstrates that, on average, democratic countries governed by the rule of law have wealthier citizens.

The committee says the richest 20% of the world’s countries are now around 30 times richer than the poorest 20%. Moreover, the income gap is persistent; although the poorest countries have become richer, they are not catching up with the most prosperous.

Acemoglu, Johnson and Robinson have connected this difference to differences in institutions, and they find this derives from differences in the behaviour of European colonisers in different parts of the world centuries ago.

The denser the indigenous population, the greater the resistance that could be expected and the fewer European settlers moved there. On the other hand, the large indigenous population – once defeated – ofered lucrative opportunities for cheap labour.

This meant the institutions focused on benefiting a small elite at the expense of the wider population. There were no elections and limited political rights.

In the places that were more sparsely populated and offered less resistance, more colonisers settled and established inclusive institutions that incentivised hard work and led to demands for political rights.

The committee says, paradoxically, this means the parts of the colonised world that were the most prosperous around 500 years ago are now relatively poor. Prosperity was greater in Mexico under the Aztecs than it was at the same time in the part of North America that is now called Canada and the United States.

More so than in previous years, this year’s winners have written for the public as well as the profession. Acemoglu and Robinson are probably best known for their 2013 best-seller Why Nations Fail: The Origins of Power, Prosperity and Poverty.(It has pictures and no equations.)

Last year Acemoglu and Johnson published Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity.

In May this year Acemoglu wrote about artificial intelligence, putting forward the controversial position that its effects on productivity would be “nontrivial but modest”, which is another way of saying “tiny”. Its effect on wellbeing might be even smaller and it was unlikely to reduce inequality.

This year’s award makes the cohort of Nobel winners a little less US-dominated.

Although all three are currently working at American universities, Acemoglu is from Turkey and the others are British. There is even an Australian link. Robinson taught economics at The University of Melbourne between 1992 and 1995.

Winning the prize is life-changing for more reasons than the 11 million Swedish kroner (about $A 1.5 million) the winners share. As Nobel winners, they will have a higher profile. Their opinions will be accorded more respect by most but not all.

Sixteen former winners recently issued a widely reported statement saying they were “deeply concerned about the risks of a second Trump administration for the US economy”. Rather than address their arguments, the Trump campaign called them “worthless out-of-touch Nobel prize winners”.

The new winners might get the same treatment. Johnson has critiqued Trump’s proposal to raise tariffs. Acemoglu has called Trump “a threat to democracy”.

About the Author:

John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Guillaume Carton, EM Lyon Business School 

McKinsey & Company and other consulting firms have long faced criticisms for their involvement with governments. Investigative journalists and academics alike have flagged their growing influence, citing cases like the staggering expenses of up to £1 million per day on private consultants for the UK’s Covid-19 Test-and-Trace service, or the €10.7 million in contracts paid to McKinsey by the French government during the same crisis.

The investigation into the French government’s over-reliance on McKinsey led to a Senate report and, eventually, a scandal dubbed “McKinsey Gate”. On September 18, journalist Elise Lucet brought the issue to the forefront with her investigative TV show Cash Investigation. The episode zeroed in on McKinsey’s ties to the 2017 presidential campaign of Emmanuel Macron, alongside allegations of fraud and tax evasion.

Cash Investigation is famous – or infamous, if you happen to be the subject of an episode – for its deep dives into corporate and political controversies. The show has exposed a myriad of scandals, from environmental misdoings to tax fraud. In the episode dedicated to McKinsey, Lucet was on a mission to unravel the web of influence it allegedly wove during Macron’s ascent to the presidency.

Consultants’ criticism

While the episode raised more than a few eyebrows, consultants who made the time to watch it were less than impressed. “Lame,” said one former strategy expert on social media. For consultants, the documentary’s criticism surrounding the financing of Macron’s 2017 presidential campaign remains limited to his relationship with Karim Tadjeddine, the McKinsey partner who managed the firm’s work with the French government. Similarly, the accusations of fraud and tax evasion were viewed as issues confined to McKinsey’s corporate financial practices, rather than something that implicated individual consultants.

As one senior public sector consultant put it, Lucet’s angle is “rather hackneyed.” With the industry experiencing at least 10% annual growth, consultants argue that they’re simply fulfilling demand. According to an insider working for one of these strategy consulting firms, Lucet is missing the real target – criticising consultants when the fault lies with the French government for mismanaging their services.

Has consulting lost its way?

Yet there is broader criticism that consulting firms have lost their professional ethos. Investigative journalist Duff McDonald, in his 2014 book The Firm, argued that McKinsey veered far from the ethical standards set by its founder, Marvin Bower, in the 1950s, who invented management consulting by taking inspiration from the law profession. What was once a field dedicated to advising clients in the public interest has since become a business focused on maximising profit for its partners.

This shift has led to a long series of scandals involving corruption, unethical work, and conflicts of interest. Other consulting firms, including Bain & Company and BCG, have also faced their fair share of scandals. In 2022, they were banned from bidding on South African government contracts for their role in a state capture scandal, and BCG recently agreed to forfeit $14 million in profits in Angola after admitting to bribery scandal.

While Cash Investigation‘s documentary sheds light on Macron’s ties to McKinsey and highlights the French’s government excessive spending, it pays little attention to a crucial distinction: unlike elected officials, who are accountable to the public, consultants operate in the private sphere. As a consequence, they’re driven by financial interests that may not always align with the government’s responsibility to ensure social welfare. This potential conflict of interest casts doubts on the objectivity and trustworthiness of their advice.

A closer look at recent scandals that strategy consulting firms have faced in advising governments reveals four types of conflicts of interest:

• Personal interests and relationships: As the Cash Investigation episode revealed, Karim Tadjeddine’s connections with Macron’s party allowed McKinsey to establish a strong foothold within government decision-making. This not only advanced Tadjeddine’s career but also underscored a deeper conflict – where consultants build relationships or align themselves with key networks to secure future contracts, bonuses, or other rewards. One common avenue for such conflicts is their pro bono work, which Cash Investigation exposed as a tool that Tadjeddine used to forge connections that later led to profitable contracts.
• Working with conflicting clients and assignments: McKinsey & Company’s involvement in the opioid crisis is a striking example. The firm provided strategic advice both to opioid manufacturers like Purdue Pharma and to the US Food and Drug Administration (FDA), which regulates the opioid market. An investigation by the US House of Representatives revealed that McKinsey failed to disclose these conflicts over a 10-year period, impacting 37 FDA contracts at a cost of over $65 million. Although Cash Investigation did not address such overlapping contracts, similar conflicts likely exist in France, where McKinsey’s work with both public and private clients raises red flags. According to the French Senate, those advising the government are legally required to declare potential conflicts of interest, yet in most cases McKinsey failed to submit these declarations.
• Profit-centered advice: In a highly publicised case, the South African Government Commission found that Bain & Company acted unlawfully colluding with private companies to manipulate government procedures and shape policies in their favour. This highlights a crucial issue overlooked by Cash Investigation: private consultants often pursue financial interests that conflict with the government’s responsibility to serve the public good. When such firms work for governments, these their profit motive can undermine social welfare goals.
• Revolving doors: Another conflict of interest involves leveraging personal connections within government to influence decisions. Largely overlooked by the documentary, this issue is significant: around 1% of McKinsey’s employees in France previously held high-ranking positions in the government, and several have transitioned into government roles. In an industry where networks create opportunities, this revolving door between consulting firms and government raises serious concerns about impartiality. A notable example outside France is Deloitte’s role in the UK’s Covid-19 Test and Trace program, as detailed in “The Big Con”. Deloitte’s close ties to government officials, including Cabinet Office minister Chloe Smith – who previously worked for Deloitte – likely fast-tracked the firm’s £279.5 million contract during the pandemic.

A missed opportunity

In its attempt to expose the relationship between McKinsey and the French government, Cash Investigation falls short of addressing deeper issues. It fails to fully explain how consultants have become invisible actors within governments, weakening democratic accountability. It also minimises the extent of conflicts of interest, which are far more pervasive than it acknowledges. While former Minister of Transformation and Public Function Stanislas Guerini explained in the documentary that he avoided pro-bono work following the Senate investigations, it raises the question: why focus on just one form of conflict of interest when there are many others at play?

This article was co-written with Master’s student Juan Carlos Javier Sakr.

Guillaume Carton, Professeur associé en Stratégie, EM Lyon Business School

This article is republished from The Conversation under a Creative Commons license. Read the original article.