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.