This year’s Nobel Prize in Economic Sciences has been awarded to Daron Acemoglu, Simon Johnson, and James A. Robinson for their work on how “persistent differences in societal institutions” help explain “why some countries are rich and others poor.” To professional economists, this award is no surprise, because these economists are giants in the field of political economy. In fact, until their work broke out in the early 2000s, the field of political economy was neglected within economics.

Perhaps their most famous single work is an article in the American Economic Review entitled, “The Colonial Origins of Comparative Development,” which used settler mortality rates to predict which colonies got “good” institutions and subsequently developed. The idea was that where Europeans were able to settle without dying like flies, they created institutions to protect private property and contracts, which in turn promoted economic development. In a related piece, they go on to explore how colonies that started out wealthy, like Barbados and Peru, often ended up being poor, while places that started out poor, like Upper Canada and Massachusetts, often ended up becoming wealthy. The explanation for this “reversal of fortune”? Once again, political institutions — specifically, those that protect entrepreneurs and investors from “expropriation risk.”

Acemoglu and Robinson wrote up a lot of this work in a way that was accessible to the layperson in their book, Why Nations Fail. I used to teach this book in some of my undergraduate political economy classes. While its account is broadly consistent with the more rigorous papers mentioned above, the book certainly plays fast and loose with its concepts of political institutions. Instead of focusing on protection of private property and contracts, the authors label their favored rules “inclusive institutions,” strongly implying throughout the text that democracy, understood as majority rule with universal suffrage, promotes economic development. The only trouble is that the institutions they find that promote development are not necessarily democratic in that sense, but have a lot more to do with simple rule of law and constraints on arbitrary power.

Academic economics abhors a consensus, and many subsequent commentators have published influential articles debunking, or attempting to debunk, various elements of Acemoglu, Johnson, and Robinson’s account of economic development. One critique is that good policies, not good institutions, promote development — and thus dictatorships can promote growth just as democracies can. The causality runs from growth to institutions, according to this critique. Another critique is that what causes growth is not the institutions Europeans brought to some of their colonies (and not others), but the human capital they brought. In other words, Europeans, because of their relative technological sophistication, brought more development wherever they settled.

However, subsequent work inspired by AJR has also confirmed the importance of institutions on a micro scale. This work looks carefully at arbitrary border discontinuities between different colonial regimes to see how they affected development over the long term. For instance, districts in Peru that historically had forced labor today still have lower-quality road networks and more subsistence farming. In addition, “[v]illages that were assigned to landlords in colonial India are poorer in 2012.” The reason is probably that “differences in historical institutions lead to very different policy choices.”

Yes, good policies — understood as protection of private property rights and freedom of contract — can promote growth even in the absence of good institutions. And democratic constitutionalism can’t on its own promote growth — look at what happened to the Latin American countries that tried to import the US Constitution wholesale. But good institutions can help “lock in” good policies. Furthermore, setting up good institutions can promote a virtuous circle in which people with high human capital come to settle so that they can live under better institutions. One example of this is my Swiss Volhynian Mennonite ancestors, who discovered that the Russian Czars’ promises of noninterference with their pacifist lifestyle weren’t worth the paper they were written on, and found opportunity and stability in America and Canada instead.

Acemoglu, Johnson, and Robinson’s work is far from the last word on explanations for why some countries are rich and some countries are poor. But they inspired a vast literature that has taught us an incredible amount over the last two decades. Just beware of anyone (including these honorees) who wants to tell a just-so story about how democracy always promotes free markets and growth.