The 2024 Nobel Prize in Economics: Explained

0:00 this fagus Rick's Bank prize in economic Sciences in honor of Alfred

0:03 Nobel known more commonly but less correctly simply as the Nobel prize

0:06 in economics is an annual prize awarded to economists who have made significant

0:10 contributions to the social sciences the reason why the Nobel prize in economics

0:14 technically has a different name is because it was not one

0:16 of the original prizes established by Alfred Nobel when he set up the foundation

0:20 to clean up his Public Image as a bomb maker it was

0:22 later added by the Swedish Central Bank which funds the prize money separately

0:26 from the other Awards which come out of the Nobel Foundation the joke

0:29 is that econom wanted a seat at the table with the real

0:31 scientists and the only way to get there was to get a sovereign

0:34 Central Bank to foot the bill now that's a little bit unfair

0:36 because well it hurts my feelings but also because economics does genuinely

0:40 have the capacity to massively improve the lives of billions of people

0:43 in the same way that the other sciences and disciplines do if they're

0:46 implemented correctly there is probably no

0:48 greater example of that ability for practical

0:50 economics to make the world a better place than the winners

0:52 of this year's prize he was awarded to these three gentlemen Darren Asam

0:56 MoGo Simon Johnson and James a Robinson beyond their specific contributions

1:01 to the social sciences that they won this year's award for these three gentlemen

1:04 are genuinely some of the most influential economists in the world as MoGo

1:08 and Robinson are probably best known for their book why Nations fail

1:11 which is effectively a summarized version of what they won their prize

1:14 for but their work as well as the work of Simon Johnson goes

1:17 beyond that their theories studies

1:19 and recommendations have impacted policy in some

1:21 of the most vulnerable economies in the world and have also been

1:24 used to make sure some of the most prosperous countries in the world

1:26 stay that way these three men have had such a profound impact

1:30 on the field that when I congratulated them on their prize I

1:32 rather awkwardly admitted that I assumed they'd already won it Anyway by pure

1:37 academic metrics asoglu himself is the third

1:40 most referenced Economist in the world

1:41 with his work being cited more than Krugman fredman or even canes what

1:45 they won their award for specifically though is their explanation for why

1:49 some countries are rich and some countries are poor so basically the biggest

1:53 question in all of macroeconomics today the top 20% of countries

1:56 in the world are 30 times richer than the poorest 20% and even though

2:00 the world is growing wealthier as a whole the ratio is not

2:03 changing which means the poorest countries

2:05 are not catching up obviously the important

2:07 question here is why which this year's laurates have presented a compelling

2:11 solution to in their Collective Decades of research their theories address a lot

2:16 of macroeconomic results that just don't inherently make a lot of sense

2:19 on a surface level like why some countries that are completely devoid

2:22 of Natural Resources arable land or even a good position for trade are

2:25 hundreds of times wealthier than other

2:27 countries that are literally sitting on top

2:29 of gold mines if all of that wasn't enough by itself probably

2:32 one of the biggest reasons that this year's winners were chosen was

2:35 because they offer solutions to these issues and workable strategies to avoid

2:38 them becoming a problem in the first place so what were the ideas

2:42 that won this year's Nobel Prize where can they be seen

2:45 in the real world and finally why are they raising alarm Bells about

2:49 our immediate future to truly understand

2:52 any country's modern economy it's essential

2:54 to examine its historical Evolution including

2:56 the significant political and economic shifts that shaped

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4:17 code when looking at a list of national economies it can be hard

4:20 to determine some kind of common

4:22 characteristic between wealthy countries and poor

4:24 countries places like Venezuela which are sitting on top of enough oil

4:28 to make their residents generationally wealthy a poor while Ireland a country

4:32 with very few natural resources has a GDP per capita almost 25 times greater

4:37 similarly landlock countries are largely some

4:40 of the poorest nations in the world

4:41 because of restricted global trade via Ocean shipping which kind of makes

4:45 sense except for the fact that a few landlock countries are some

4:48 of the richest places in the world with Switzerland Luxembourg and lichenstein

4:51 being particular standouts finding a common

4:54 trait that determines economic success or failure

4:56 seemed pretty elusive until this year's winners suggested that it wasn't natural

5:00 resources Geographic position population sizes

5:03 or anything like that which separated wealthy nations from poor Nations it was

5:07 instead almost universally the stability and reliability

5:10 of those Count's institutions at its most foundational level an economy is

5:15 really just a system for effectively

5:16 allocating resources between participants and the best

5:19 way to ensure that participants feel compelled to create value for that system

5:23 is for them to reliably be rewarded for their efforts now this applies

5:26 to all institutions from something as large as central banks National treasuries

5:30 all the way down to local planning officers small businesses the media

5:34 and even individual public servants if an economy is full of well-managed honest

5:39 and effective institutions then its people

5:41 potential investors businesses and the government itself

5:44 can get to work producing value confident in the fact that their investments

5:48 in whatever form they take won't be yanked away from them

5:51 a worker in an advanced economy with good institutions can do something

5:54 like confidently spend years studying for a degree that would give them access

5:57 to a skilled profession like engineering

6:00 because that country has institutions in place

6:01 to make sure that the degree they're getting is from a reputable institution

6:04 there are bodies in place to require that degree to get a license

6:07 that license is needed to sign off on engineering projects and that engineering

6:11 projects get paid for because they are fair and impartial courts

6:14 to enforce contracts a worker from an economy without any of these institutions

6:18 would find it difficult to make a living designing buildings if contracts

6:21 just go to whoever has the best government connections and if there are

6:24 no systems in place to make sure that qualifications are met then

6:27 there probably won't be the same investment into obtaining skills in the first

6:30 place even something as simple as a government Department that issues driver's

6:34 licenses based on reasonable and fairly

6:36 tested standards means that insurance companies will

6:38 have more confidence in insuring truck drivers which makes local trade more

6:42 commercially viable which helps businesses operate

6:44 which employs people who can pay taxes

6:46 to an effective tax agency to fund services like a government Department

6:50 that issues licenses now of course this is just one very oversimplified example

6:54 but the core idea is the same advanced economies with good institutions

6:58 let people invest a lot of resources into becoming highly specialized safe

7:02 in the knowledge that if they efficiently do their specific job there are

7:05 systems in place to make sure they can trade that work in for everything

7:08 else they'll need if everybody in an economy can become more specialized

7:12 in something they do really well then the economy will be richer now

7:16 this is a sound theory that does hold true across basically every

7:19 economy in the world today it's almost impossible to think of a poor

7:22 country that has good fair

7:23 and reliable institutions likewise it's equally difficult

7:26 to think of a rich country that has stayed rich without these institutions

7:30 now this year's laurates weren't actually the first people to recognize

7:33 this correlation but correlation doesn't equal

7:37 causation it's possible that rich countries just

7:40 have good institutions because good institutions

7:42 are expensive a government that pays

7:44 all of its workers well enough to avoid the Temptations of bribery

7:48 big well-funded Education Centers and financial

7:50 systems employing well-qualified and competent managers

7:53 are all kind of expensive what's more is that in an increasingly globalized

7:57 World there is the Temptation for individuals and businesses that do operate

8:01 these institutions to just move to rich countries where they can be paid

8:04 more for their services in a global phenomenon most commonly referred

8:07 to as brain drain so the first thing that the laurates had to show

8:12 was that good institutions made countries rich instead of rich countries just

8:16 been able to afford good institutions the way they did this was

8:19 by looking back through history and tracing

8:21 the scars of colonialism in their research of economic history the laurits found

8:26 interesting patterns amongst former colonial regions

8:29 the regions that were the richest before colonialism were the poorest after

8:33 colonialism all other things been equal

8:35 this shouldn't be the case because wealth

8:37 before modern economic systems was primarily determined by how arable the land

8:40 was and if it had natural resources not too dissimilar to the assumptions

8:44 of today the difference was that when the colonial Empire started operating

8:48 in regions that were already wealthy

8:49 and prosperous they had to establish institutions

8:52 that would suppress the existing local

8:54 populations and turned them into a subservient

8:56 labor force to help them with extracting resources on on the flip

8:59 side less prosperous regions with less

9:01 dense populations weren't quite as threatening

9:04 but unfortunately for the colonizers they had to do a lot of the work

9:07 themselves the institutions that were established

9:10 in the regions that were wealthier before colonialism were all about controlling

9:13 and taking advantage of the existing

9:15 population this meant that when the colonial empires left or were forced

9:18 out it was easy for new parties to come in and take advantage

9:22 of the same institutions that were

9:23 all about controlling people these institutions

9:26 on top of being more prone to poor management and Corruption also encouraged

9:29 economic exploitation rather than productive development

9:33 now back 400 years ago that was

9:34 a perfectly good way to claim a lot of wealth but these days

9:38 the wealthiest economies are those that can encourage value creation rather than

9:41 value extraction it also didn't help

9:44 that the empires running these militarized colonies

9:46 also mostly left after they were kicked out creating a power vacuum

9:49 and taking with them their knowledge of how to run these institutions

9:52 even if they were highly exploitative now on the other hand the regions

9:56 that had smaller less dense populations

9:58 were simultaneous vious ly less threatening

10:00 to the colonial empires that didn't have to go up against a standing

10:02 military but also less useful because there wasn't a ready-made labor force

10:06 provided to them this meant that they had to provide their own

10:09 labor force through Colonial settlers even

10:11 if their work would be heavily supported

10:13 by slave or convict labor imported from elsewhere the institutions set up

10:17 in these kinds of environments most notably the Modern Day USA but also

10:21 Canada New Zealand and Australia had

10:23 to support these independent operations rather

10:25 than treating the whole Colony as a work site there exclusively to produce

10:28 spices or tea or whatever these settler colonies had to encourage people

10:33 to travel from Europe to make a life there so they created systems

10:36 to protect their Investments dish out

10:38 property rights and give them political Liberties that were clearly not afforded

10:41 to the indigenous inhabitants of the other colonies

10:44 again when these colonial empires took a step back or were forced

10:47 out these regions that were less

10:48 prosperous before colonialism just inherited these institutions

10:52 they were more conducive to running a sound economy the settlers also

10:55 tended to remain in these colonies and adopt them as their own homes

10:58 after claiming Independence which means that there

11:00 was more continuity and the knowledge

11:02 of how to manage these institutions was maintained in the new country

11:05 now it's important to recognize that just because the Nations that formed

11:08 in these regions are more prosperous in the modern day doesn't necessarily mean

11:12 that the indigenous population fared that much better and tragically there is

11:15 of course still a divide between these groups within these economies just like

11:19 there's a gap between these economies now with that essential piece of context

11:23 one of the clearest examples of this playing out in the real

11:26 world was actually outlined in the announcement of this year's winners

11:28 in something that rather poetically called The Tale of Two Cities the city

11:32 of nalis is divided by a fence that runs east to west

11:36 in the North nalis Arizona boasts incredibly

11:38 High incomes by global standards a long

11:40 life expectancy good access to education and of course they have good

11:43 reliable institutions that provide property rights

11:46 legal protections a stable currency a relatively

11:49 corruption free system of rules and regulations and all of this is

11:52 overseen by representative governments all the way up from the local mayor

11:55 to the president on the other side of the fence nalas in sonor

11:58 Mexico is considerably poorer doesn't enjoy the same quality of life and has

12:03 significant issues with organized crime and Corruption these are two halves

12:07 of the same city that share the same culture the same geography the same

12:10 climate and even the same Heritage the only difference is whether they're

12:13 operating under the institutions of the USA or the institutions of Mexico Mexico

12:18 was home to the Aztec which during the Spanish Colonial period was

12:21 something that needed to be controlled

12:22 and has contributed to institutions that are

12:24 less representative even to this day it was this historical context

12:28 and dozens of examples they've studied across the world that allowed this year's

12:31 laurates to back up the idea that good institutions do create Rich

12:35 economies it's not just that rich economies can afford to have good institutions

12:39 now that might sound like a lot of background research just

12:42 to prove a causal relationship but with Stakes this high it was essential

12:47 otherwise their advice to Nations focusing

12:49 on creating these robust institutions would

12:51 be like telling a homeless person to just buy a home instead they've

12:55 been able to do what a lot of economists would never dare

12:57 to do and actually make some con constructive recommendations to improve a bad

13:01 situation so Asam MoGo Johnson

13:04 and Robinson demonstrated a causal connection between

13:06 running good institutions which means that good

13:08 policy can be recommended to support

13:10 those institutions the problem is that's easier said than done if setting

13:14 up fair well-managed institutions could make

13:16 an economy wealthier with no trade-offs then

13:18 obviously every economy would do it the problem of course is that unfairly

13:22 run institutions often benefit the people who make the policy and even

13:26 if they have their people's best interest in mind running these institutions

13:30 takes a lot of skills and experience now the first part is obviously

13:33 the biggest hurdle for a lot of economies the elites that make

13:35 the rules receive an economic benefit from making those rules to favor them

13:39 at the expense of their people and they don't want to give

13:42 that up unless they can be sure their economic situation would improve now

13:45 often times it actually could by giving back a bit of control

13:49 institutions almost always run better when they're beholden to the people it is

13:53 theoretically better to be a national leader of a highly prosperous economy than

13:57 the despot of a failing state but there's no guarantee that those people

14:01 would keep their positions of power and wealth if they introduce fairer

14:04 systems this puts a lot of economies into a vicious stalemate where

14:08 both the ruling class and the people would be better off

14:10 in a more egalitarian society but neither side can trust the other to make

14:14 the first move now what the laurates found throughout history is

14:17 that the most effective way for economies

14:19 to transition from one with poor institutions

14:21 was through the peaceful nonviolent transfer

14:23 power rather than revolutions which tend

14:25 to create a whole new ruling class and are just generally more trouble

14:29 their worth now these might not sound like insanely cuttingedge ideas but it's

14:33 important to remember that this prize was awarded for work done over

14:36 decades empirically showing that fairer

14:39 and better managed institutions were not only

14:41 one of the causes of economic success but probably the biggest cause was

14:45 huge and before the work of these men there was no clear

14:48 consensus on the economic value of a democracy with checks and balances versus

14:52 something like a benevolent dictatorship now

14:55 obviously it's incredibly hard to distill

14:57 the work of literal Nobel prizewinning Research into a concise video but if

15:01 you want more details I can wholeheartedly recommend their book why Nations

15:04 fail it goes into fascinating historical case studies in a style not too

15:08 dissimilar to the way that we do on this channel but instead

15:10 of some random guy on the Internet it's written by two Nobel prizewinning

15:13 economists we were also lucky enough to speak with Professor Asam MoGo

15:16 earlier this year and he set the record straight on exactly what has

15:19 been holding Africa back from the economic success that it's capable of you

15:23 should be able to click to that video on your screen now

15:25 or if you want to listen to our full interview with him it's

15:27 available on Spotify and most other

15:29 streaming services thanks for watching mate bye