This year's laureates of the Nobel Prize for Economics are Daron Acemoglu, Simon Johnson and James Robinson, three authors renowned for their studies on institutions and the impact of institutional factors on economic prosperity. Their most representative work is Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012), which has also been translated into Romanian. Even though Simon Johnson did not co-author this book, he collaborated with Acemoglu and Robinson on numerous other influential works, such as The Colonial Origins of Comparative Development: An Empirical Investigation (2001).The recognition of scientific contributions in the field of institutional economics is now reconfirmed. Approximately three decades ago, Nobel Prizes were also awarded to two of the most important authors in this field: Ronald Coase (1991) and Douglass North (1993). Later, in 2009, another Nobel Prize recognized institutional economics research, with the laureates being Oliver Williamson and Elinor Ostrom. Among the authors considered this year, one should not overlook Harold Demsetz, who, according to many experts, also deserved to win the Nobel Prize given his significant contributions to the field of institutional economics.
As a field of scientific research and a discipline of study, institutional economics is relatively young, although its research often draws on analyses in economic history, not just in modern contexts but also through antiquity and the pivotal eras of institutional development (be they economic, legal, or cultural), which are indispensable today.
However, the increased interest in the field of institutional economics was empirically confirmed in the 1990s, when the collapse of communism in Central and Eastern Europe paved the way for 'institutional transition', a process of both profound transformation and gradual evolution in former communist countries.
To understand the 'institutional' theme, however, one must first eliminate the confusion between institutions and organizations—a confusion that, though harmless, is quite widespread in everyday vocabulary. As Douglass North wrote, “institutions represent the rules of the game and organizations are the players”. Thus, institutions represent the rules, be they formal or informal, economic, legal, constitutional or cultural, while organizations stand for companies, entities, political parties, universities, authorities or governments, etc.
The basic idea is that rules, meaning institutions, shape human behaviours and interactions, thereby determining how things function in society, while organizations 'play' by the rules, often with the goal of changing them to align with their own interests.
The research of this year’s Nobel laureates demonstrates that the development gaps between poor and rich countries are predominantly determined by the nature of their institutions (which can be inclusive or extractive). The authors define inclusive institutions as those rules that create new opportunities for the population, while extractive institutions facilitate the 'perverse redistribution', meaning the transfer of wealth to the already affluent population through the accumulation of privileges and preferential norms in society, ultimately leading to increased inequality and poverty.
For instance, the phenomenon of division and segregation that defines the evolution of Korea after the Second World War, provides a compelling illustration of these aspects. South Korea, influenced by the democratic institutions of the United States, developed thanks to inclusive institutions that offered the population productive incentives. In contrast, North Korea, shaped by Russian influences, regressed under the burden of extractive institutions, which exploited the population through dictatorial coercion, disregarding the rule of law, human rights, and economic freedom.
Institutions thus eloquently explain phenomena such as inequality and poverty, which are now considered the primary risks in human society. Institutions are the ultimate explanatory factor for the development gaps of nations and this is precisely why institutional economics will remain an essential field of research within economic science, due to the accuracy of its demonstrations and the viability of its conclusions.
Nota Bene: Not coincidentally, building on the doctoral research I have conducted within the Bucharest University of Economic Studies, in 2005 I established the first university course on Institutional Economics in Romania, with the conviction that studying institutions and their role in economic development is a valuable and timely endeavour for the Romanian higher education system. Thus, the course on Institutional Economics that I teach at the Faculty of Theoretical and Applied Economics provides a comprehensive perspective on the institutions/rules that ensure legitimate rule of law in society and contribute to supporting economic development.