The 2024 Nobel Prize in Economics: Explained

0:00 this fagus Rick's Bank prize in economic

0:01 Sciences in honor of Alfred Nobel known

0:03 more commonly but less correctly simply

0:05 as the Nobel prize in economics is an

0:07 annual prize awarded to economists who

0:09 have made significant contributions to

0:10 the social sciences the reason why the

0:12 Nobel prize in economics technically has

0:14 a different name is because it was not

0:16 one of the original prizes established

0:18 by Alfred Nobel when he set up the

0:19 foundation to clean up his Public Image

0:21 as a bomb maker it was later added by

0:23 the Swedish Central Bank which funds the

0:25 prize money separately from the other

0:26 Awards which come out of the Nobel

0:28 Foundation the joke is that econom

0:30 wanted a seat at the table with the real

0:31 scientists and the only way to get there

0:33 was to get a sovereign Central Bank to

0:34 foot the bill now that's a little bit

0:36 unfair because well it hurts my feelings

0:38 but also because economics does

0:39 genuinely have the capacity to massively

0:41 improve the lives of billions of people

0:43 in the same way that the other sciences

0:44 and disciplines do if they're

0:46 implemented correctly there is probably

0:48 no greater example of that ability for

0:50 practical economics to make the world a

0:51 better place than the winners of this

0:53 year's prize he was awarded to these

0:55 three gentlemen Darren Asam MoGo Simon

0:57 Johnson and James a Robinson beyond

0:59 their specific contributions to the

1:01 social sciences that they won this

1:02 year's award for these three gentlemen

1:04 are genuinely some of the most

1:06 influential economists in the world as

1:08 MoGo and Robinson are probably best

1:09 known for their book why Nations fail

1:11 which is effectively a summarized

1:12 version of what they won their prize for

1:14 but their work as well as the work of

1:16 Simon Johnson goes beyond that their

1:18 theories studies and recommendations

1:20 have impacted policy in some of the most

1:22 vulnerable economies in the world and

1:23 have also been used to make sure some of

1:25 the most prosperous countries in the

1:26 world stay that way these three men have

1:28 had such a profound impact on the field

1:30 that when I congratulated them on their

1:32 prize I rather awkwardly admitted that I

1:33 assumed they'd already won

1:35 it Anyway by pure academic metrics

1:38 asoglu himself is the third most

1:40 referenced Economist in the world with

1:41 his work being cited more than Krugman

1:43 fredman or even canes what they won

1:46 their award for specifically though is

1:47 their explanation for why some countries

1:49 are rich and some countries are poor so

1:52 basically the biggest question in all of

1:54 macroeconomics today the top 20% of

1:56 countries in the world are 30 times

1:58 richer than the poorest 20% and even

2:00 though the world is growing wealthier as

2:02 a whole the ratio is not changing which

2:04 means the poorest countries are not

2:06 catching up obviously the important

2:07 question here is why which this year's

2:10 laurates have presented a compelling

2:11 solution to in their Collective Decades

2:13 of research their theories address a lot

2:16 of macroeconomic results that just don't

2:17 inherently make a lot of sense on a

2:19 surface level like why some countries

2:21 that are completely devoid of Natural

2:22 Resources arable land or even a good

2:24 position for trade are hundreds of times

2:26 wealthier than other countries that are

2:28 literally sitting on top of gold mines

2:30 if all of that wasn't enough by itself

2:32 probably one of the biggest reasons that

2:33 this year's winners were chosen was

2:35 because they offer solutions to these

2:36 issues and workable strategies to avoid

2:38 them becoming a problem in the first

2:40 place so what were the ideas that won

2:43 this year's Nobel Prize where can they

2:45 be seen in the real world and finally

2:47 why are they raising alarm Bells about

2:49 our immediate future to truly understand any country's

2:53 modern economy it's essential to examine

2:55 its historical Evolution including the

2:57 significant political and economic

2:58 shifts that shaped the nation but

3:00 learning about the past isn't just for

3:02 economists uncovering the truth of your

3:03 own family history can be just as

3:05 fascinating and insightful we've

3:07 partnered with my Heritage a platform

3:08 that lets you discover the stories of

3:09 your relatives and your ancestors by

3:11 searching through over 19 billion

3:13 historical documents for you Charlie one

3:15 of our team at economics explained use

3:17 my Heritage to find details about

3:18 members of his family and especially of

3:20 his grandfather on his mother's side who

3:22 was a holocaust Survivor there aren't

3:24 many basic records like his birth

3:25 certificate for obvious reasons but by

3:27 looking through connections he was able

3:29 to create a pretty comprehensive map of

3:31 his family dating back to the late 1800s

3:33 and find out his great-grandmother's

3:34 maiden name and her extended family The

3:36 Jacksons the search doesn't stop there

3:38 with truly amazing insights like a

3:40 newspaper clipping about Charlie's

3:41 great-grandparents wedding in 1895 and

3:43 images of his grandfather's engineering

3:45 patn and once he added a lot of his

3:47 immediate family the instant discoveries

3:49 page gave him the marriage records of

3:50 his mother's parents from 1953 in

3:52 Westminster in the UK and further

3:54 research surfaced a beautiful picture of

3:56 their wedding day that his family had

3:57 not seen before it looked even better

3:59 after using my Heritage picture restorer

4:01 to colorize and sharpen it and Charlie

4:02 got it framed for his mom as a Christmas

4:04 present so why not start building your

4:06 family tree you don't know if you don't

4:08 look and you could even have living

4:09 relatives you never knew about you can

4:11 get a 14-day free trial of my Heritage

4:13 when you join using our Link in the

4:14 description or by directly scanning this

4:16 QR code when looking at a list of

4:19 national economies it can be hard to

4:21 determine some kind of common

4:22 characteristic between wealthy countries

4:24 and poor countries places like Venezuela

4:26 which are sitting on top of enough oil

4:28 to make their residents generationally

4:29 wealthy a poor while Ireland a country

4:32 with very few natural resources has a

4:34 GDP per capita almost 25 times greater

4:37 similarly landlock countries are largely

4:39 some of the poorest nations in the world

4:41 because of restricted global trade via

4:43 Ocean shipping which kind of makes sense

4:45 except for the fact that a few landlock

4:47 countries are some of the richest places

4:49 in the world with Switzerland Luxembourg

4:50 and lichenstein being particular

4:52 standouts finding a common trait that

4:54 determines economic success or failure

4:56 seemed pretty elusive until this year's

4:58 winners suggested that it wasn't natural

5:00 resources Geographic position population

5:02 sizes or anything like that which

5:04 separated wealthy nations from poor

5:06 Nations it was instead almost

5:08 universally the stability and

5:09 reliability of those Count's

5:11 institutions at its most foundational

5:14 level an economy is really just a system

5:16 for effectively allocating resources

5:17 between participants and the best way to

5:19 ensure that participants feel compelled

5:21 to create value for that system is for

5:23 them to reliably be rewarded for their

5:25 efforts now this applies to all

5:27 institutions from something as large as

5:28 central banks National treasuries all

5:30 the way down to local planning officers

5:32 small businesses the media and even

5:35 individual public servants if an economy

5:37 is full of well-managed honest and

5:39 effective institutions then its people

5:41 potential investors businesses and the

5:43 government itself can get to work

5:45 producing value confident in the fact

5:47 that their investments in whatever form

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

5:51 a worker in an advanced economy with

5:53 good institutions can do something like

5:54 confidently spend years studying for a

5:56 degree that would give them access to a

5:58 skilled profession like engineering

6:00 because that country has institutions in

6:01 place to make sure that the degree

6:02 they're getting is from a reputable

6:04 institution there are bodies in place to

6:06 require that degree to get a license

6:07 that license is needed to sign off on

6:09 engineering projects and that

6:11 engineering projects get paid for

6:12 because they are fair and impartial

6:13 courts to enforce contracts a worker

6:16 from an economy without any of these

6:17 institutions would find it difficult to

6:19 make a living designing buildings if

6:21 contracts just go to whoever has the

6:22 best government connections and if there

6:24 are no systems in place to make sure

6:25 that qualifications are met then there

6:27 probably won't be the same investment

6:28 into obtaining skills in the first place

6:31 even something as simple as a government

6:33 Department that issues driver's licenses

6:35 based on reasonable and fairly tested

6:36 standards means that insurance companies

6:38 will have more confidence in insuring

6:40 truck drivers which makes local trade

6:42 more commercially viable which helps

6:43 businesses operate which employs people

6:45 who can pay taxes to an effective tax

6:47 agency to fund services like a

6:49 government Department that issues

6:51 licenses now of course this is just one

6:53 very oversimplified example but the core

6:55 idea is the same advanced economies with

6:57 good institutions let people invest a

6:59 lot of resources into becoming highly

7:01 specialized safe in the knowledge that

7:03 if they efficiently do their specific

7:05 job there are systems in place to make

7:06 sure they can trade that work in for

7:08 everything else they'll need if

7:10 everybody in an economy can become more

7:11 specialized in something they do really

7:13 well then the economy will be richer now

7:16 this is a sound theory that does hold

7:17 true across basically every economy in

7:19 the world today it's almost impossible

7:21 to think of a poor country that has good

7:23 fair and reliable institutions likewise

7:26 it's equally difficult to think of a

7:27 rich country that has stayed rich

7:29 without these institutions now this

7:31 year's laurates weren't actually the

7:32 first people to recognize this

7:34 correlation but correlation doesn't

7:36 equal causation it's possible that rich

7:39 countries just have good institutions

7:41 because good institutions are expensive

7:43 a government that pays all of its

7:45 workers well enough to avoid the

7:46 Temptations of bribery big well-funded

7:48 Education Centers and financial systems

7:51 employing well-qualified and competent

7:52 managers are all kind of expensive

7:55 what's more is that in an increasingly

7:57 globalized World there is the Temptation

7:59 for individuals and businesses that do

8:01 operate these institutions to just move

8:03 to rich countries where they can be paid

8:04 more for their services in a global

8:06 phenomenon most commonly referred to as

8:08 brain drain so the first thing that the

8:11 laurates had to show was that good

8:12 institutions made countries rich instead

8:15 of rich countries just been able to

8:16 afford good institutions the way they

8:19 did this was by looking back through

8:20 history and tracing the scars of

8:22 colonialism in their research of

8:24 economic history the laurits found

8:26 interesting patterns amongst former

8:27 colonial regions the regions that were

8:30 the richest before colonialism were the

8:32 poorest after colonialism all other

8:34 things been equal this shouldn't be the

8:36 case because wealth before modern

8:37 economic systems was primarily

8:39 determined by how arable the land was

8:41 and if it had natural resources not too

8:43 dissimilar to the assumptions of today

8:45 the difference was that when the

8:46 colonial Empire started operating in

8:48 regions that were already wealthy and

8:49 prosperous they had to establish

8:51 institutions that would suppress the

8:53 existing local populations and turned

8:55 them into a subservient labor force to

8:57 help them with extracting resources on

8:59 on the flip side less prosperous regions

9:01 with less dense populations weren't

9:03 quite as threatening but unfortunately

9:05 for the colonizers they had to do a lot

9:06 of the work themselves the institutions

9:09 that were established in the regions

9:10 that were wealthier before colonialism

9:12 were all about controlling and taking

9:14 advantage of the existing population

9:16 this meant that when the colonial

9:17 empires left or were forced out it was

9:19 easy for new parties to come in and take

9:21 advantage of the same institutions that

9:23 were all about controlling people these

9:25 institutions on top of being more prone

9:27 to poor management and Corruption also

9:29 encouraged economic exploitation rather

9:31 than productive development now back 400

9:34 years ago that was a perfectly good way

9:35 to claim a lot of wealth but these days

9:38 the wealthiest economies are those that

9:39 can encourage value creation rather than

9:41 value extraction it also didn't help

9:44 that the empires running these

9:45 militarized colonies also mostly left

9:47 after they were kicked out creating a

9:49 power vacuum and taking with them their

9:50 knowledge of how to run these

9:52 institutions even if they were highly

9:54 exploitative now on the other hand the

9:56 regions that had smaller less dense

9:58 populations were simultaneous vious ly

9:59 less threatening to the colonial empires

10:01 that didn't have to go up against a

10:02 standing military but also less useful

10:04 because there wasn't a ready-made labor

10:06 force provided to them this meant that

10:08 they had to provide their own labor

10:09 force through Colonial settlers even if

10:11 their work would be heavily supported by

10:13 slave or convict labor imported from

10:15 elsewhere the institutions set up in

10:17 these kinds of environments most notably

10:19 the Modern Day USA but also Canada New

10:21 Zealand and Australia had to support

10:23 these independent operations rather than

10:25 treating the whole Colony as a work site

10:27 there exclusively to produce spices or

10:29 tea or whatever these settler colonies

10:32 had to encourage people to travel from

10:33 Europe to make a life there so they

10:35 created systems to protect their

10:36 Investments dish out property rights and

10:39 give them political Liberties that were

10:40 clearly not afforded to the indigenous

10:42 inhabitants of the other colonies again

10:44 when these colonial empires took a step

10:46 back or were forced out these regions

10:48 that were less prosperous before

10:49 colonialism just inherited these

10:51 institutions they were more conducive to

10:53 running a sound economy the settlers

10:55 also tended to remain in these colonies

10:57 and adopt them as their own homes after

10:58 claiming Independence which means that

11:00 there was more continuity and the

11:01 knowledge of how to manage these

11:03 institutions was maintained in the new

11:04 country now it's important to recognize

11:06 that just because the Nations that

11:08 formed in these regions are more

11:09 prosperous in the modern day doesn't

11:11 necessarily mean that the indigenous

11:13 population fared that much better and

11:15 tragically there is of course still a

11:16 divide between these groups within these

11:18 economies just like there's a gap

11:20 between these economies now with that

11:22 essential piece of context one of the

11:24 clearest examples of this playing out in

11:25 the real world was actually outlined in

11:27 the announcement of this year's winners

11:28 in something that rather poetically

11:30 called The Tale of Two Cities the city

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

11:34 east to west in the North nalis Arizona

11:37 boasts incredibly High incomes by global

11:39 standards a long life expectancy good

11:41 access to education and of course they

11:43 have good reliable institutions that

11:45 provide property rights legal

11:46 protections a stable currency a

11:48 relatively corruption free system of

11:50 rules and regulations and all of this is

11:52 overseen by representative governments

11:53 all the way up from the local mayor to

11:55 the president on the other side of the

11:57 fence nalas in sonor Mexico is

11:59 considerably poorer doesn't enjoy the

12:01 same quality of life and has significant

12:03 issues with organized crime and

12:05 Corruption these are two halves of the

12:07 same city that share the same culture

12:09 the same geography the same climate and

12:10 even the same Heritage the only

12:12 difference is whether they're operating

12:14 under the institutions of the USA or the

12:16 institutions of Mexico Mexico was home

12:18 to the Aztec which during the Spanish

12:20 Colonial period was something that

12:21 needed to be controlled and has

12:23 contributed to institutions that are

12:24 less representative even to this day it

12:27 was this historical context and dozens

12:28 of examples they've studied across the

12:30 world that allowed this year's laurates

12:32 to back up the idea that good

12:33 institutions do create Rich economies

12:35 it's not just that rich economies can

12:37 afford to have good institutions now

12:40 that might sound like a lot of

12:41 background research just to prove a

12:43 causal relationship but with Stakes this

12:46 high it was essential otherwise their

12:48 advice to Nations focusing on creating

12:50 these robust institutions would be like

12:51 telling a homeless person to just buy a

12:53 home instead they've been able to do

12:55 what a lot of economists would never

12:57 dare to do and actually make some con

12:59 constructive recommendations to improve

13:01 a bad situation so Asam MoGo Johnson and

13:04 Robinson demonstrated a causal

13:06 connection between running good

13:07 institutions which means that good

13:08 policy can be recommended to support

13:10 those institutions the problem is that's

13:12 easier said than done if setting up fair

13:15 well-managed institutions could make an

13:16 economy wealthier with no trade-offs

13:18 then obviously every economy would do it

13:20 the problem of course is that unfairly

13:22 run institutions often benefit the

13:24 people who make the policy and even if

13:26 they have their people's best interest

13:28 in mind running these institutions takes

13:30 a lot of skills and experience now the

13:32 first part is obviously the biggest

13:33 hurdle for a lot of economies the elites

13:35 that make the rules receive an economic

13:37 benefit from making those rules to favor

13:39 them at the expense of their people and

13:41 they don't want to give that up unless

13:42 they can be sure their economic

13:44 situation would improve now often times

13:46 it actually could by giving back a bit

13:48 of control institutions almost always

13:50 run better when they're beholden to the

13:52 people it is theoretically better to be

13:55 a national leader of a highly prosperous

13:57 economy than the despot of a failing

13:58 state but there's no guarantee that

14:01 those people would keep their positions

14:02 of power and wealth if they introduce

14:04 fairer systems this puts a lot of

14:06 economies into a vicious stalemate where

14:08 both the ruling class and the people

14:10 would be better off in a more

14:11 egalitarian society but neither side can

14:13 trust the other to make the first move

14:15 now what the laurates found throughout

14:16 history is that the most effective way

14:18 for economies to transition from one

14:20 with poor institutions was through the

14:21 peaceful nonviolent transfer power

14:24 rather than revolutions which tend to

14:25 create a whole new ruling class and are

14:27 just generally more trouble their worth

14:30 now these might not sound like insanely

14:32 cuttingedge ideas but it's important to

14:34 remember that this prize was awarded for

14:36 work done over decades empirically

14:38 showing that fairer and better managed

14:40 institutions were not only one of the

14:41 causes of economic success but probably

14:43 the biggest cause was huge and before

14:46 the work of these men there was no clear

14:48 consensus on the economic value of a

14:50 democracy with checks and balances

14:52 versus something like a benevolent

14:54 dictatorship now obviously it's

14:56 incredibly hard to distill the work of

14:58 literal Nobel prizewinning Research into

15:00 a concise video but if you want more

15:02 details I can wholeheartedly recommend

15:03 their book why Nations fail it goes into

15:06 fascinating historical case studies in a

15:07 style not too dissimilar to the way that

15:09 we do on this channel but instead of

15:10 some random guy on the Internet it's

15:12 written by two Nobel prizewinning

15:13 economists we were also lucky enough to

15:15 speak with Professor Asam MoGo earlier

15:17 this year and he set the record straight

15:18 on exactly what has been holding Africa

15:20 back from the economic success that it's

15:22 capable of you should be able to click

15:23 to that video on your screen now or if

15:25 you want to listen to our full interview

15:27 with him it's available on Spotify and

15:29 most other streaming services thanks for

15:31 watching mate bye