The Royal Swedish Academy of Sciences, following a recommendation by the Economic Sciences Prize Committee, awarded the Nobel Prize in Economics to Daron Acemoglu, Simon Johnson and James A Robinson for their so-called “groundbreaking” work on the role of institutions in shaping economic development.
Their analysis highlights how inclusive institutions drive economic success while extractive institutions contribute to national failure. This decision recalls the 2009 Nobel Prize, which recognized Elinor Ostrom and Oliver E Williamson for their seminal contributions to economic governance, particularly on how institutions and organizations manage common resources and resolve conflicts.
In 2009, the Nobel Committee acknowledged the importance of institutions and governance by selecting a political scientist and an economist who studied these aspects within firms. Similarly, the 2024 prize reflects a shift away from free-market economics, emphasizing instead how institutional frameworks and governance structures affect economic outcomes.
Why has the Nobel Committee consistently favored non-economic theories over traditional economic models, particularly after successive economic and financial crises? Look no further than the changing geopolitical economy and the constraints the Nobel selection committee likely faced.
The 2009 decision to award Ostrom and Williamson was primarily driven by the aftermath of the 2008 global financial crisis, a time when Western free-market ideologies faced intense scrutiny.
The long-held belief that markets allocate resources optimally—resulting in goods and services at the lowest prices, maximum profits for producers and no resource wastage—was shown to be fundamentally flawed.
Alan Greenspan, a key proponent of neoliberal economic thinking and the long-serving chairman of the US Federal Reserve, famously admitted during a congressional hearing that he had erred in assuming that markets allocate resources efficiently.
“A critical pillar of market competition and free markets did break down,” Greenspan said. “I still do not fully understand why it happened.”
Given this, the selection of Ostrom and Williamson was more of a necessity than a choice; selecting a free-market economist would have been morally indefensible in the context of the economic meltdown of the time.
The selection committee faced a similar situation in 2024. In recent years, the West has steadily abandoned the ideals of free-market economics and free trade in the face of China’s state-led and subsidy-fed economic juggernaut.
Traditional economic thinking argues that subsidies are harmful to free markets because they create a disconnect between prices and production costs, thereby distorting markets, leading to inefficient outcomes and diverting resources to less productive activities. Trade protectionism is also viewed as a market distortion that leads to inefficiencies and misallocations.
However, US President Joe Biden’s economic policies have clearly departed from free-market principles. His industrial policies have been characterized by heavy government intervention, including direct subsidies, tax breaks and cheap credit, while his trade policies have resulted in unprecedented protectionism in American history.
The Inflation Reduction Act (IRA), the CHIPS & Science Act, and the Research and Development, Competition and Innovation Act are key pieces of legislation that provide substantial subsidies and tax breaks to American firms. The Biden administration has also instituted a “Buy America” policy for government procurement, a serious violation of World Trade Organization (WTO) agreements.
These policies and favorable loan terms for US businesses underscore Biden’s promotion of protectionist trade policies. This includes maintaining Trump-era tariffs on foreign goods, domestic content requirements and punitive measures against alleged foreign dumping in US markets.
Ironically, the United States has imposed tariffs of up to 100% on Chinese-made electric vehicles (EVs), far exceeding the tariffs under the Smoot–Hawley Tariff Act of the 1930s, which imposed a maximum tariff of about 62%.
In an April 27, 2023 speech at the Brookings Institution, US National Security Advisor Jake Sullivan outlined the Biden administration’s economic policy, attributing many of the country’s challenges—such as a hollowed-out manufacturing base, economic inequality, China’s rise and the climate crisis—to past economic policies.
Sullivan criticized “hyperglobalization,” deregulation and blind faith in trickle-down economics and market efficiency. He argued that trade liberalization was pursued as an end in itself, neglecting its broader consequences.
This represents a stark US break from the 1990s “Washington Consensus,” which championed free markets and trade liberalization and was driven globally by the US Treasury, International Monetary Fund and World Bank.
Sullivan made it clear that Bidenomics does not rely on the free-market ideology that the West once promoted as superior to other economic systems. “There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently—no matter what our competitors did, no matter how big our shared challenges grew and no matter how many guardrails we took down,” Sullivan said.
“Now, no one—certainly not me—is discounting the power of markets. But in the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas. And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.”
Sullivan’s remarks suggest that the United States is pivoting away from the market economy and adopting a more protectionist stance, regardless of the outcome of the 2024 presidential election in November.
The West has also undermined the sanctity of private property through its Russian asset seizure, which challenges the institution of private ownership. These sanctions, which include freezing assets and expropriating the Russian Central Bank’s assets held in Western banks, represent a direct assault on private property rights.
This unprecedented move sets a dangerous precedent by politicizing economic assets and again undermining the principles of market-based economies. By blurring the lines between political retribution and economic governance, the US-led West has eroded the trust that global capital relies on.
This destabilizes the global economic order and diminishes confidence in Western markets, undermining the laissez-faire economic ideology.
One of the greatest paradoxes of the early 21st century is that the United States, once the staunchest advocate of free-market economics and free trade, is implementing protectionist policies on a scale not seen since the 1930s.
In effect, the US is prioritizing national security over economic efficiency while quitting on the notion that “the government is best which governs least.” Meanwhile, China’s Communist Party-led government has become the world’s leading advocate for free trade.
By awarding the Nobel Prize to economists focused on institutions, the Nobel Selection Committee has de facto endorsed the West’s shift toward protectionism and away from liberalization and globalization. Institutional economics, in this context, justifies greater government intervention in the economy to the detriment of free markets once championed by the US and West.
