From whence it came

Digging for the roots of the rich/poor divide.

This article originally appeared in the Spring 2025 issue of Thinking Minnesota magazine.

In October 2024, the Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Daron Acemoglu, Simon Johnson, and James A. Robinson. The Academy cited the recipients for demonstrating “the importance of societal institutions for a country’s prosperity.” Furthermore, “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.”

Since Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, the question of why some countries are rich and others are poor has been a major subject of economic research. In the aftermath of World War II, the dominant explanation was that poor countries lacked capital. It followed that giving “developing” countries more capital — physical capital in the form of tractors or building materials or financial capital in the form of aid — would make them richer.

But for all the trillions of dollars of aid dumped into these so-called developing countries, many of them stubbornly refused to develop. Even worse, the poor countries that did develop, such as the “Asian Tigers,” were generally those not being stuffed with aid. Something was missing.

In addition, the “capital deficiency” explanation for the wealth of some countries and the poverty of others failed to explain why it was that the rich countries had capital in the first place. Maybe Britain did have more capital in 1750 than the average African kingdom, but why was that the case?

Economists largely settled on “institutions” as the answer. These are generally summarized as “the rules of the game in a society,” wrote economist Douglass North, who won the Nobel Prize for his work in 1993. “[M] ore formally,” he wrote, “they are the humanly devised constraints that shape human interaction.” In a seminal 1989 paper with Barry Weingast, North argued that the subjection of the English crown to Parliament following the Glorious Revolution of 1688 led to “secure property rights…and the elimination of confiscatory government” and that “the new institutions allowed the government to commit credibly to upholding property rights. Their success was remarkable, as the evidence from capital markets shows.”

John Maynard Keynes wrote that David Ricardo’s free-trade doctrines “conquered England as completely as the Holy Inquisition conquered Spain,” and the same could be said of this idea of institutions for economics. Indeed, when I was studying at the London School of Economics and Political Science a decade ago, it wasn’t much of an exaggeration to say that you could likely receive a decent mark on an economic growth exam if you’d written the word “institutions” on your paper and then walked out. North’s work led to the Nobel for Acemoglu, Johnson, and Robinson.

But the institutional explanation contains some of the same deficiencies as the old capital deficiency explanation. If rich countries are rich because they have better institutions than poor ones, we must explain why.

In their 2012 bestseller, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Acemoglu and Robinson argued that inclusive economic institutions that protect the property rights of wide sections of society — like those in England after the Glorious Revolution — led to economic growth, while extractive economic institutions that exclude large segments of the population from the distribution of income from their own activities did not. Furthermore, they argued that where the disease environment made it easier for European colonists to settle, they did so in large numbers and replicated institutions from their home countries, as seen in the British colonization of Australia and North America. Where the disease environment did not permit this, however, as in South America, colonists established extractive regimes.

But another reason the British and Spanish colonists imported different economic institutions was that those at home were different. While the Glorious Revolution was working its institutional magic in Britain, the contemporaneous “Bourbon Reforms” in Spain resulted in no basic changes in the pattern of property holding, and institutions remained extractive well into the 20th century. While Acemoglu and Robinson illustrate, again, the importance of institutions, they fail to provide a convincing account of their origin.

The search for why some countries have growth-enhancing institutions and others do not continues. The answer lies in history. The Glorious Revolution was not an exogenous shock, it was endogenous; in other words, it was rooted in the particular circumstances of 17th-century Britain, which were in turn the result of the particular circumstances of previous centuries. The origins of our current wealth, or lack of it, might lie very deep in our past.