The Nobel in Econ (a/k/a The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) for 2024 was awarded a few days ago to Daron Acemoglu and Simon Johnson of MIT and to James Robinson of the University of Chicago.
Here at Adam Smith, Esq., we try to make it a habit to note, if not always celebrate, the annual awarding of the Economics Nobel and this year’s provides emphatic reaffirmation of the critical role of the Rule of Law in undergirding, enabling, and advancing human prosperity.
Those of you who have been even the most casual students of Adam Smith, Esq. and Adam Smith himself may know that he is our hero as much for his 1759 Theory of Moral Sentiments as for his far more famous 1776 Wealth of Nations. And the principles of Moral Sentiments undergird the thinking of the 2024 Nobel winners. As the Nobel Committee put it, drawing a sharp distinction between countries that enjoyed “inclusive societal institutions” vs those burdened by “extractive institutions:”
When Europeans colonised large parts of the globe, the institutions in those societies changed. This was sometimes dramatic, but did not occur in the same way everywhere. In some places the aim was to exploit the indigenous population and extract resources for the colonisers’ benefit. In others, the colonisers formed inclusive political and economic systems for the long-term benefit of European migrants.
[…]Some countries become trapped in a situation with extractive institutions and low economic growth. The introduction of inclusive institutions would create long-term benefits for everyone, but extractive institutions provide short-term gains for the people in power.
Elaborating, as MIT noted in its announcement of the award:
In their work, Acemoglu, Johnson, and Robinson make a distinction between “inclusive” political governments, which extend political liberties and property rights as broadly as possible while enforcing laws and providing public infrastructure, with “extractive” political systems, where power is wielded by a small elite.
Overall, the scholars have found, inclusive governments experience the greatest growth in the long run. By contrast, countries with extractive governments either fail to generate broad-based growth or see their growth wither away after short bursts of economic expansion.
More specifically, because economic growth depends heavily on widespread technological innovation, such advances are only sustained when and where countries promote an array of individual rights, including property rights, giving more people the incentive to invent things. Elites may resist innovation, change, and growth to hold on to power [emphasis supplied], but without the rule of law and a stable set of rights, innovation and growth stall.
Extending this, with a dose of analytic license, to Law Land: Firms should beware over-indexing on hoarding their profits for a handful of powerful producers at the top of the pyramid. I don’t have to tell you that we not only believe in incentives but in “flight risk” if your stars feel shortchanged, but those stars depend to an existential degree they may find it awkward to admit to on a large cast of supporting partners, associates, financial and technology and operational experts–and management itself. When you turn on your tap, you expect water to come out and when you plug in your laptop, you expect it to charge. How long would any of us last by ourselves otherwise?
More pointedly, is your firm comforting itself with the lazy assumption that Rule 5.4 will constitute a barrier to technology-centric businesses investing all-in on Generative AI to provide legal advice? 5.4 is a weak and eroding reed which will not, and should not, frustrate what Adam Smith, Joseph Schumpeter, and this year’s Nobel laureates know.
If you doubt me, go ask Acemoglu, Johnson, and Robinson themselves.
Photo by Anastacia Dvi on Unsplash
