In a very recently published study, likely future Nobel Prize laureate Daron Acemoglu (who was awarded the John Bates Clark medal, a leading indicator for Nobel Prize wins, in 2005) and a couple of well-known colleagues revisit the old question of the comparative advantages of cut-throat societies like the USA on the one hand and more European – style states (such as Norway, Sweden, Finland, Denmark, and presumably Germany) on the other hand, and provide an intriguing answer that ought to bear on what’s left of the public policy discourse in Australia, especially in the run-up to the federal election next year.
The basic story that Acemoglu and his colleagues formalize (based on stylized facts that I found persuasive if somewhat incomplete), is this: Inequality attracts more entrepreneurial activity which leads to more innovation (as measured by patent measures); in essence this part of the story is illustrated by the USA. (And, yes, we can argue about causality here, can’t we always?)
Innovation, of course, moves the production frontier out. Importantly, innovation activity also creates considerable knowledge spillovers that allow others (“Scandinavians”) to free-ride on that knowledge creation and to design and implement „cuddlier“ societies. It is, so Acemoglu et al. argue, quite possible that “Scandinavian” societies are better off by various measures.
Why then would not every country (want to) free-ride? Well, they might want to but … in order for others to free-ride some fool has to give them the opportunity. In other words, symmetric equilibria – where either every state is Scandinavian, or every state is non-Scandinavian – are dominated by an asymmetric equilibrium (or possibly several asymmetric equilibria), and that is a good thing from a global point of view. It’s an intriguing idea. And I think it has a lot to go for it. (I am also sure that those at the receiving end in the USA, arguably approximated by Romney’s 47 percent estimate, do not like the reality of it at all.)
Clearly, the Acemoglu et al. paper has some bearings on the debate about the growing inequality in Australia – since 1980, the top 1 percent doubled, and the top 0.1 percent tripled their share -, as reflected in Swan’s recent song as well as the continuing political debate on inequality, evidenced very recently here (Joye in AFR on Egalitarian distribution of income is destructive) and here (Leigh, identified by Joye as Australia’s leading inequality expert, in response, also in AFR, on Take the test, which society do you prefer?)
Leigh’s position, and Labor’s for that matter, is essentially that being more “Scandinavian” is a good thing because a) the spoils of the minerals resources boom ought to be spread more fairly, b) it is good for the social fabric, and c) if state revenues are invested properly (e.g., in education and social services for those truly in need), they will enhance the growth and welfare prospects of the country more than more cut-throat strategies are likely to do. The work by Acemoglu et al. seems to strengthen this latter argument considerably.
Of course, ultimately it is all about the right mix of equity and efficiency although it is worth reminding ourselves that equity and efficiency are not necessarily substitutes. Acemoglu et al. argue that this insight does not only apply to organizational processes.
Core Economics 
Lane Kenworthy’s response to the paper is worth reading: http://lanekenworthy.net/2012/09/29/will-everyone-be-worse-off-if-the-united-states-turns-social-democratic/
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Another concern about the paper is the use of patents as a measure of the level of innovation in the economy.
Isn’t it that a contributing factor o their higher number of patents in the USA is that their business culture is to patent everything under the sun, whereas in the other countries considered patents are used in a narrower range of circumstances?
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The paper, to me, misses on its promise of ‘plausible assumptions’. Also…
1. I find this whole argument that large incentives are required for innovation a little odd. Especially if we assume people are risk averse.
Would you rather risk your lifetime savings on a new venture in the US, with very little safety net, or Sweden? I’m not sure, but I personally would be more willing to do it if I could be assured a reasonable standard of living by the community as a whole if it all went pear-shaped.
2. Most innovation comes from businesses investing in new methods of production. Why exactly would income taxes and redistribution have much to say about that? Wouldn’t high corporate taxes mean more incentive for companies to invest in research and innovation rather than pay dividends? (e.g. Japan)
3. See Rober Merkel. Also, patents in the US don’t have to come from US citizens or companies (although the authors attempt to control for this)
4. Although economists swear by it (without ever really knowing what they mean), innovation/technology is usually a minor contributor to improving per capita output. Capital investment with existing known methods of production generally drives most growth.
5. It assumes that all innovation comes from the private sector, and none from government sponsored research (including defence).
6. It really says nothing about what makes a country cuddly or cut-throat. Which institutions? The European countries cited are very different.
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Matt,
thanks for the link to the Kenworthy piece. which makes for an interesting read. Of course, his restriction to the Swedish case is a drawback. I also note that responder 4 to the Kenworthy piece points to research that seems to support at least some of the claims in Acemoglu et al. It will take a while for the validity of these claims to be sorted out … and it will take a while to create more complex models that deal with institutional idiosyncracies, definitional issues, and the more complex reality (where in the Acemoglu et al story fit, for example, in India or China?). What intrigued me was the idea of an asymmetric equilibrium, or possibly a whole set of them, in this context which — because the reality of knowledge spillovers seems well-established — I find rather persuasive and intuitive. I think there is something to their story but try to keep an open mind on the evidence. Of which, I have no doubt, there will be plenty streaming in in the years ahead.
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Robert,
yes, that is also a concern although Acemoglu et al are carefully to muster the evidence …(e.g., they look at patent filings as well as cites of patents [see Figures 2 and 3 in their paper]; the latter arguably a better measure but admittedly not a perfect one).
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Rumplestatskinn,
greetings to Brisbane.
As mentioned above in my response to Matt , I think the basic story (of asymmetric equilibria resulting from knowledge spillovers) strikes me as rather plausible.
As to your risk aversion assumption, it does not impress me much. Aren’t, almost by definition, entrepreneurs and innovators risk-loving? I’m sure there must be some evidence out there on that.
We know for sure that people differ widely in their risk-attitudes … so the assumption that “people are risk averse” strikes me, especially in this context, as highly problematic,
I don’t think that the typical entrepreneur worries much about her or his security net when things go pear-shaped. They are way too young for it. Also, innovation is of course not just provided by indiviuals … and incentives surely matter for venture capitalists or regular firms that engage in research.
I don’t think it is correct that most innovation comes from businesses investing in new methods of production (but I am not an expert in this area except for work I did on the emerging computer industry a long time ago.) Think Intel or Microsoft or Apple at the very beginning, or the computer industry that emerged around the same time and gave the incumbents a run for their money. Once businesses get involved, things like market structure and competition also matter (e.g., http://cep.lse.ac.uk/people/bloom/ABBGH.pdf).
Good point about innovation not coming all from the private sector, and some coming from government sponsored research … U r must be thinking about CSIRO, or ARC funded research , I assume … Something that needs to be controlled for, for sure.
And yes, what exactly makes a country cuddly or cut-throat is an interesting question all by itself although most people would probably agree with the statement that the USA is more cut-throat than the European countries mentioned in the Acemoglu et al paper, or Germany for that matter. As a first motivation that’s good enough for me.
See also my response to Matt above.
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