Applied Optimization

This year’s laureates in the economic sciences have helped us understand differences in prosperity between nations. Daron Acemoglu, Simon Johnson and James Robinson have demonstrated the importance of societal institutions for a country’s prosperity. Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better. The laureates’ research helps us understand why. #NobelPrize

The introduction of more inclusive institutions, less extraction and the rule of law would create long-term benefits. So why don’t the elite simply replace the existing economic system? The laureates’ model for explaining the circumstances under which political institutions are formed and changed has three components. The first is a conflict over how resources are allocated and who holds decision-making power in a society (the elite or the masses). The second is that the masses sometimes have the opportunity to exercise power by mobilising and threatening the ruling elite; power in a society is thus more than the power to make decisions. The third is the commitment problem, which means that the only alternative is for the elite to hand over decision-making power to the populace. #NobelPrize