The coveted awards to economists, some of whom have influenced governments in major ways such as on inflation policy and growth, shine a light on the links between stable legal systems, democracy, honest governance, and economic prosperity. Investors should take note.

The award of a Nobel Prize for three US-based economists who have explained how democracy and the rule of law underpin economic growth has been praised by a wealth manager who has stressed the need for investors to grasp “autocracy risk.”

Daron Acemoglu, Simon Johnson and James Robinson will share the prize, which carries a cash award of $1 million. Daron Acemoglu is from the Massachusetts Institute of Technology, Cambridge, US, as is Simon Johnson. James A Robinson is from the University of Chicago.

The prize, awarded since 1969 to economists such as Milton Friedman, F A Hayek, Paul Krugman, Paul Samuelson, Douglass North, James Tobin and Gary Becker, is arguably the most coveted in the economics profession. Winners have often influenced governments, as Friedman and Hayek did with the Thatcher and Reagan administrations in the 1980s, for example.

The Nobel Committee praised the trio for explaining why “societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better.”

Arguably, the importance of stable legal frameworks and accountable government has been known since ancient times, and certainly since the Enlightenment, but modern economics appears to lend extra weight to the argument. And their work comes at a time when, according to some, democracy and the rule of law are in retreat.

“Of course, attributing the Nobel Prize to research focused on the link between political institutions and prosperity in 2024 is not a neutral choice, it sends a clear message to all of us: citizens, investors, and corporate executives,” Yves Choueifaty (pictured), founder of asset management house TOBAM, told this news service. “There is plenty of academic research proving the benefits of democracy on the economy as a key driver of development and prosperity. Despite this, this dimension is very often underestimated, if not neglected, by the investment management industry. We really hope such a prize will act as a wake-up call for investors throughout the world.”

Dr Eamonn Butler, director and co-founder of the Adam Smith Institute in the UK, praised the award of the prize to the economists. 

“It is perhaps fitting that 50 years after F A Hayek received the Nobel Prize in Economic Science for his work, not just on business cycle theory, but on the structures needed for a prosperous society, that the 2024 Prize has gone to Daron Acemoglu, Simon Johnson and James A Robinson.

“Cemoglu and Robinson famously wrote Why Nations Fail, which looked for the factors that lead to some nations becoming rich while others remain poor. Economists have had many theories about this – geographical factors, cultural theories, race, religion, colonialism, and much more. But together with Simon Johnson, who co-authored several other articles with the two, the prizewinners sought better explanations," Dr Butler told this news service.

Autocracy risk
TOBAM’s Choueifaty spoke to this publication in March 2024 about how, in July 2023, his firm had unveiled a new strategy range called LBRTY®, which aims to mitigate portfolio exposure to autocracies. To some extent, it is an extension of ESG ideas on investing, but with a more clearly pronounced focus on freedom, respect for property rights and due process of law.

The Nobel Prize announcement underscores how important such an approach is, Choueifaty said.

“This…award illustrates once again that there are, in a nutshell, two kinds of political regimes across the world: the first kind of regime could be described as (imperfectly) respecting an (imperfect) rule of law. The other kind of regime is mafia-like regimes: rule of brutality and violence. Studying how much the governments across mafia-like regimes tend to ally and form explicit or implicit coalitions is a field of research that would be quite fertile,” he said.

Choueifaty was asked if he thought a “democracy recession" that we are seeing (Russia, etc) has been a galvanizing force in demonstrating the value of this work by the economists?

“Acemoglu, Robinson and Johnson started to research this field long ago. At the time, that was mainly focused on resolving the income gap across countries globally. We should clearly keep in mind that the main driver for economists has not been political or ideological, but focused on helping [to] lift people out of poverty,” he replied. “The fact that, as you mention it, democracy has been on a weakening path recently only emphasizes how important it is for people’s wellbeing, and for long-term investment returns, to pay attention to the democratic pillars of public life. Inclusive institutions are not about taking sides, but a universal condition for collective progress and prosperity.”

The Adam Smith Institute’s Dr Butler said the three economists’ award was timely.

“A fundamental point they [the award winners] note is that in order to secure sustainable progress in science and technology development, which is of course vital for raising living standards, property rights are fundamental. The freedom to innovate – indeed, the incentive to innovate – and the ability to protect your intellectual property through patents is an essential part of it.

“Also important are inclusive economic and political systems that rest on broad participation in public policymaking. That, they conjecture, came about in medieval societies because the wealthy – and this was an age when wealth was gained by taking it from other people, not by creating it through entrepreneurship – came to fear the rising power of the masses.

"Industrialization, in particular, led to a wealthier general public who began to challenge the power basis of the old exploitative wealth owners. The authors also have interesting insights about the colonial export of democracy and liberal values to the colonized countries, and what this means for their prosperity today,” Dr Butler added.