Why social welfare states need the United States

Because of their more limited inequality and more comprehensive social welfare systems, many perceive average welfare to be higher in Scandinavian societies than in the United States. Why then does the United States not adopt Scandinavian-style institutions?

…we develop a simple model of economic growth in a world in which all countries benefit and potentially contribute to advances in the world technology frontier. A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence a country’s contribution to the world technology frontier.

We show that, under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of “cutthroat” capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism.

Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism.

I have making this argument for years, but Acemoglu, Robinson and Verdier bring coherence, theory, and actual evidence to the table.

Updated score: Acemoglu/Robinson 33,492; Blattman 1.

50 Responses

  1. “I think that the asymmetric equilibrium between cutthroat and cuddly capitalism is a powerful and paradigm-changing concept.”

    Well, there’s no reason to see if it’s true or not, then, is there? Because it’s “powerful” and “game-changing”. By the way, do you know that I have a phlebotinum mine under my house? Phlebotinum is a metal that goes upwards in response to gravity. It is powerful and game-changing.

  3. I think that the asymmetric equilibrium between cutthroat and cuddly capitalism is a powerful and paradigm-changing concept. Let us create a life cycle and after the US and Scandinavian countries we have emerging economies, developing and failed countries – the later with the example of Afghanistan, consuming huge amount of (military) aid and providing drugs to the rest of the world. But it is an equilibrium, both sides win. The US attracts talent from all over the world, manages the world currency to its benefits, dominates global affairs – you name it. It is an fascinating insight.

  4. I think that the asymmetric equilibrium between cutthroat and cuddly capitalism is a powerful and paradigm-changing concept. Let us create a life cycle and after the US and Scandinavian countries we have emerging economies, developing and failed countries – the later with the example of Afghanistan, consuming huge amount of (military) aid and providing drugs to the rest of the world. But it is an equilibrium, both sides win. The US attracts talent from all over the world, manages the world currency to its benefits, dominates global affairs – you name it. It is an fascinating insight.

  5. “A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort”

    This is called “assuming your conclusion”.

  6. This is exactly why Stalin was right to purge the universities of their entrenched status quo scum. The economists will be the first against the wall when the revolution comes.

  7. This does not at all correspond to reality over the last 50 years or so, and still doesn’t. To me it seems like a far to simplistic conclusion and you have to ignore so many factors for this to make any sense.

    Given that it depends on how you measure a country’s “contribution to the world technology frontier” but “cuddliness” doesn’t seem to be the determining factor on any global index or measurement that tries to capture this.

    US is as best #10 on several innovation index and other attempts behind many cuddly welfare states.

    Please explain, Chris?

  8. I am confused about why this would be considered work of any particular insight. Instead of studying the actual histories of actual countries, we are given a model that assumes social planners (who?) “choose” government policy on social welfare. Would it have been too much trouble to actually, you know, study the mechanisms through which social welfare policies were adopted in the United States?

  9. Another item to add — and it’s important — is the way the US pays for most drug innovation. The socialized medicine countries then bargain like crazy to get a good price. Without all that extra money coming in there would be seriously less world-wide drug innovation.

  10. There’s also a good analogy with health-care.

    As a Canadian, I am simultaneously appalled by the US health-care system and aware that the Canadian system is as good as it is because we can piggy-back off of the American system’s “cut-throat” aspects (technological advances paid for by rich patients and as a pressure reliever from those who would demand a second, higher tier of service for the wealthy).

  11. One more thing I forgot to mention above, that will probably strengthen the thesis in the paper, is the fact that the Scandinavian private sector – and the Norwegian in particular – spend very little resources on R&D. In fact, Norway have one of the lowest ratios of R&D to GDP of any OECD country. Perhaps this is a result of the main thesis in the paper: That the Scandinavian private sector are free-riding on the R&D of others?

  12. Reading was all good till i encountered unnecessary maths and weird, horrendous graphs and curves. Why do economists think that you cannot explain complex things without these things? Chris, help me answer this. You have to wonder whether these publications are only meant for economists or informing the wider public.

    As I mentioned earlier, I stay in Norway. This article raises very important questions and I’m not really sure whether the people in Scandinavia (especially Norway) want to face these things head on. Before I begin, though many scholars want to put Scandinavia in one bracket as far as the welfare state goes, an individual look at each of these countries could paint a more clear picture (Sweden is more aggressive as far as innovation goes) Also, consider the level of welfare- You see, the ‘generosity’ of the welfare state in Norway is more ‘ridiculous’ as compared to the other countries in the region (excuse my language, I use ridiculous for lack of a better term) And BTW, there’s an ongoing debate here whether the state can sustain this ‘cradle to grave’ welfare policy.
    Now, a few things should be noted here.
    1- Even though I’m very critical of this level of welfare, Norway is such a great place (especially for senior citizens), I would choose this country over any other, all factors considered, not even Canada comes close. When someone was thinking of the term ”good governance”. they had Norway and its other Scandinavian sister in mind. It’s a good place to live and retire. The government will never let it’s people down, They will rise with you and they will be there when you fall. In the US, people will cheer you on on your way up and laugh at you when things go downhill. You can not find veterans sleeping on the streets in Norway. (Should I also note that you will be hard pressed to see homeless people here)
    2- ”We have also shown that, paradoxically, starting with similar
    initial conditions, those that choose cuddly capitalism, though poorer, will be better o¤ than those opting for cutthroat capitalism” I don’t know whether the authors were talking about poverty in the sense of a poorer governments than that of the US, or poor people. Whatever it is, I have never witnessed poverty (by European standards) here among people and I’ve been to both Finland and Denmark too. May be I’ wrong. I don’t know.

    Having said that, I do have to agree that a generous welfare state reduces (if not kills) the incentive for people to innovate, not to mention to even work. I know some people and have heard of many others here who don’t work and can still afford vacation in Turkey or Morocco. I think the problem with this is reversing the one of God’s ‘Natural laws’. “If a man will not work, he shall not eat.”- read: 2 Thessalonians 3:10. This is a very serious issue. I remember having first moved here an adult, a graduate student from a developing country, I was in utter shock. Uganda is one of those countries at the bottom of the world, but I can tell you that the people are more creative that most folks I’ve met here. They only lack facilitation. Its only that like most African countries,the government is screwing up everything. This coupled with decades of colonization and exploitation by the Brits (Issues for another discussion) This in it’s self should be enough to scare the hell out of Scandinavians. Also, education is totally free, but this opportunity is not fully exploited (especially graduate studies) I know that they already know it but I will say it- I always think Norway could borrow a leaf from Germany. Let me put it this way, Imagine Germany with all the natural resources that Norway is endowed with. I can say it would be many times a bigger and better economy that the US.

    – ”because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism”- Of course you guys are working for the people here, I couldn’t agree more. Most people and the state here, can afford the sophistication that comes with latest inventions in technology, yet no one has to sleep in labs. In fact, I’ve never heard of any student or researcher ‘overnighting’ here. Most people will be out their offices at 15:30. Fig.1 showed annual average hours worked, even before looking at it I knew Norway would have the least hours.:)

    – The authors mentioned the strength of unions and social democratic politics in trying to justify their claims, but I’m a surprised that they missed out the point of ”Value system” in the Scandinavia. Sometimes, when you look at the culture here and what the people value most, its hard not understand why things are the way they are here. I hate generalizations, but unlike the US, most people here don’t care for things like becoming stinking rich, owing big things (big car, big houses, big yachts), having wardrobes full of designer clothes, attending elite schools (they don’t even exist, thank God), being the smarted in the room, and all those other pathetic things that people spend a lifetime accumulating. Also, No one cares if you the richest guy in the country.

    – Finally, the authors answer the critical question that the US can not be like the Scandinavians. Well,……while you can not do that, the most important thing is whether you can still be US but without letting war veterans, senior citizens and Americans at large sleep on streets, go without meals and health care. With all the things that the US has achieved, this is a disgrace (and calling this a disgrace is an understatement)

  13. I would like to challenge two of their basic assumptions:
    1. The Us is more innovative on a pr capita basis
    2. The Us have higher social mobility

    FIrstly, the graph of patent filings may be selective, as it only dates back to 1995. What have happened in all Scandinavian countries since 1995 is that inequality have increased (reforms towards a more ‘cutthroat capitalism), foreign ownership of the larger firms have increased dramatically, and the prospects of registering patents in the EU rather than the US have improved. I am not saying the the US isn’t more innovative than the Scandinavians, but the ‘proof’ forwarded in the paper doesn’t prove much. Furthermore, I would like to see a discussion on the prospect for scale and scope of innovation clusters and industrial structure.

    The other assumption forwarded is that the US have a higher social mobility. This is wrong, and refuted over and again (I don’t have the time to find proper links, but that should not be overly difficult for the interested reader).

    The Scandinavian welfare model originated during teh Great Depression. The argument in the paper would be strengthened considerably if it took a longer perspective on the institutional arrangements. As they themselves state in the last paragraph of the conclusion:

  14. This is exactly the hypothesis that Glenn Loury put to Timothy Noah back in April. Here: http://bloggingheads.tv/videos/9601

    I recommend watching the first 12 minutes or so, if only to oggle at how Tim could not understand what Glenn was saying, how Glenn had to repeat the hypothesis 3 times, and how even once he understood it all Tim could come up with in response was “well, I’m not sure,” and then they moved on.

    Seems like a pretty important “possibility to be explored,” as Glenn put it, by “economists,” who Glenn also said have done a pretty poor job at studying inequality to date. And also by progressives like Tim, who judging from this discussion hasn’t taken seriously enough either.

  17. First off, I could not not download the article from ”http://www.ssrn.com/” because I couldn’t buy it. I couldn’t buy it because I don’t think it’s right to buy this information, it should be free (I know that this is subject to debate). So I did what most students do (search for a free source first), and I got it here: http://economics.mit.edu/files/8095

    I stay in one of those countries where the state feels that free health care and education are moral issues (Norway). I will come back with an opinion after a thorough read over a mug of coffee and a pack of cig’s……………

  18. Simple question then; What’s the evidence that “A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence a country’s contribution to the world technology frontier.”?