Blog Post

Blogs review: Can we all be more like Scandinavians?

What’s at stake: An interesting debate about the trade-off between innovation and redistribution has sparked over the (admittedly wonky) paper by Daron Acemoglu, James Robinson and Thierry Verdier in which the authors argue that the "cuddly" capitalism of Europe could not sustain high levels of growth in the absence of the "cutthroat" capitalism of America. Entrepreneurs in those ruthless economic models bear more risks – and thus move the technology frontier faster. While still in Working Paper format and written for an academic audience, the paper was picked up by several bloggers who criticized the premises, the methodology and the conclusions.

By: and Date: February 4, 2013 European Macroeconomics & Governance Tags & Topics

What’s at stake: An interesting debate about the trade-off between innovation and redistribution has sparked over the (admittedly wonky) paper by Daron Acemoglu, James Robinson and Thierry Verdier in which the authors argue that the "cuddly" capitalism of Europe could not sustain high levels of growth in the absence of the "cutthroat" capitalism of America. Entrepreneurs in those ruthless economic models bear more risks – and thus move the technology frontier faster. While still in Working Paper format and written for an academic audience, the paper was picked up by several bloggers who criticized the premises, the methodology and the conclusions.

Are more redistributive European countries free-riding on the US?

Dylan Mattews writes on the Wonk Blog that many left-leaning folks look admiringly to Scandinavia as a region that has managed to make true social democracy work. Acemoglu and al. argue, however, that their economic growth is only possible because Scandinavian companies can piggyback on, or copy, innovations that originate in the U.S. If the U.S. adopted a Scandinavian-style government, those innovations wouldn’t occur as fast, and both America and Scandinavia would do worse.

Daron Acemoglu and James Robinson provide some background to the paper in their blogs “Why Nations Fail”. There is a line of work in political science, sometimes referred to as the “Varieties of Capitalism” literature. The main idea is that there are many different ways of organizing a capitalist economy, perhaps with two polar cases being a Coordinated Market Economy (CME), which captures certain salient features of Scandinavian countries, and a Liberal Market Economy (LME), proxying for a US style economy. This literature suggests that both of these institutional/organizational arrangements can lead to high incomes and similar growth rates, in particular, because LMEs generate radical innovations, particularly in sectors such as software development, biotechnology and semiconductors, while CMEs are good at incremental innovation in sectors such as machine tools, consumer durables and specialized transport equipment; as part of this institutional arrangements, they also provide more social insurance and generate less inequality. Because their economic outcomes are similar but CMEs provide better social insurance to their citizens, if an LME could turn itself into a CME, this would be associated with a significant gain in welfare.

Daron Acemoglu and James Robinson writes that the main idea of their paper is to observe that international linkages are absent from this picture, and to suggest that the institutional choice of that society is not entirely independent of the choices of others. The surprising result is this: in equilibrium those under cutthroat capitalism cannot switch to cuddly capitalisms because of the interdependences in the world economy: when others are doing cuddly, it’s a best response to do cutthroat because the cutthroat country is contributing disproportionately to the world technology frontier and a switch from cutthroat to cuddly would slow down world growth.

Patent-count and the US lead in innovation

Matthew Yglesias writes that one thing many people have seized on is that at a key stage in their argument they rely on a patent-count as an index of innovation, and note that this is ridiculous. And it is ridiculous (for starters two of Sweden’s biggest firms, Ikea and H&M, operate in the design sector and are ineligible for intellectual property protections). But the problem is that it’s not just ridiculous, it’s a standard procedure in the field.

Daron Acemoglu and James Robinson write that Yglesias is right in pointing out that patents only capture some specific types of innovation and many important breakthroughs in productivity will not show up there. But this is not an excuse for ignoring the wealth of data on patents, especially given that the economics literature has shown how patents correlate with growth both at the aggregate and firm level.

Financial incentives and innovation

Mark Thoma argues that there must be diminishing returns to incentives. If we take away $50 million in taxes leaving someone the prospect of earning "only" $100 million in net profit, would the person really decide to give up the project? Would someone really decide it isn’t worth it to only earn $100 million and work less or give it up altogether? Or is it the case that by the time you get to that much income, a marginal increase of decrease in profit has almost no effect on incentives? And for those in the game simply to see who can accumulate the most, so long as the rules are the same for all, incentives won’t change either.

Lane Kenworthy suggests reasons to doubt that modest inequality and generous cushions are significant obstacles to innovation. Despite low inequality and high government spending in the 1960s and 70s, there was plenty of innovation over that period in the US. Second, the Nordic countries, with their low-income inequality and generous safety nets, currently are among the world’s most innovative countries.

Dimitros Diamantaras picks up an interesting example from a commenter to the post by Mark Thoma. One of the most important innovations of the last two decades or so has been the development of Linux, on which run most of the web servers in the world, as well as the many, many phones and other devices that run Android. But Linux came out of the “cuddly” capitalism of Scandinavia (and indeed, from a then 21-year old student who opened it up to the world not in order to get rich but to learn and because he loved to tinker with operating system software).

Social insurance and innovation

Mark Thoma argues that an enhanced safety net — a backup if things go wrong — can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation.

Noah Smith writes that the authors assume that the only cost of entrepreneurship is effort. “We assume that workers can simultaneously work as entrepreneurs (so that there is no occupational choice). This implies that each individual receives wage income in addition to income from entrepreneurship”. In other words, the authors have assumed away much of the risk of entrepreneurship! A failed entrepreneur gets paid exactly the same wage income as a worker who doesn’t try to be an entrepreneur at all! This automatic wage income reduces the risk of entrepreneurship substantially, and makes social insurance much less necessary for reducing risk. 

Daron Acemoglu and James Robinson write that current inequality is likely way beyond what would be necessary to provide the right sort of incentives to entrepreneurs since it has at least in part political roots and causes severe challenges to the (already dwindling) inclusivity of American institutions. Second and equally importantly, the mechanism in their paper clearly refers to inequality among entrepreneurs, whereas a lot of the inequality in the United States is among workers. It should be obvious that providing a safety net at the bottom of the distribution will not be a major factor in innovation decisions.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

Big data and first-degree price discrimination

What’s at stake: first-degree price discrimination - or person-specific pricing, had until recently been considered a theoretical case with unlikely real-world application. Yet the increasing availability of big data could make this possible. We review recent contributions on this issue.

By: Silvia Merler Topic: Innovation & Competition Policy Date: February 20, 2017
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Inflation's comeback

What at stake: After years of deflationary pressures and anaemic economic performance, inflation seems to be on the rise again, both in the US and the euro area. Does this comeback mark a return to target? Will it be sustained, and what should central banks be thinking? These are among the questions raised in the blogosphere.

By: Pia Hüttl Topic: Global Economics & Governance Date: February 13, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Is Germany a currency manipulator?

What’s at stake: the Financial Times reports that Peter Navarro, head of the US’s National Trade Council, has accused Germany of currency manipulation. He claims that the country uses a 'grossly undervalued' Euro to 'exploit' its trading partners. Angela Merkel replied that the Euro is managed by the European Central Bank, on which Germany does not exert influence. We review what the economic blogosphere thinks of this.

By: Silvia Merler Topic: Global Economics & Governance Date: February 6, 2017
Read article More by this author

Blog Post

Silvia Merler

Climate change and financial markets

What’s at stake: Ever since the 2016 Paris Agreement to reduce emissions was signed, researchers have been looking at the impact that moves towards a low-carbon economy might have on financial markets and financial stability. We review these contributions here. 

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: January 30, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Tariffs and the American poor

What’s at stake: much has been said and debated — during the US election and beyond — about the distributional impact of free trade on the disadvantaged. But what would be the distributional impact of a new protectionism instead?

By: Silvia Merler Topic: Global Economics & Governance Date: January 23, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The economic effects of migration

What’s at stake: migration is currently a very hot topic in both the US and the EU. Immigration issues have come to the forefront due to the problem of rapidly ageing populations, the refugee crisis, and growing anti-immigration political rhetoric. But what do we know about the economic effects of migration?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 16, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Compensating the “losers” of globalisation

What’s at stake: According to some, 2016’s political turmoil shows that the so-called “losers” of globalisation are striking back. There is, however, little agreement on how government should respond to this challenge.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 9, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

2016: The end

What’s at stake: 2016 is coming to an end. It will be remembered as an annus mirabilis and horribilis, at the same time. 2016 brought us some previously unthinkable political shocks, and admittedly took away some of our finest musicians. It also couldn’t help taking away Willy Wonka and Princess Leia, making this a much sadder Galaxy. This raises an obvious question: what are we in for, in 2017?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 31, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The American dream

What’s at stake: historian James Truslow Adams, in his 1931 book The Epic of America, stated that the American dream is "that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. Few ideas have ever been as powerful as the “American Dream”, and many recent political events hinge on the fear that this “dream” may be dead. Meanwhile, researchers have been trying to measure the reality behind the dream.

By: Silvia Merler Topic: Global Economics & Governance Date: December 19, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The political economy of macroprudential policy

What’s at stake: the emergence of renewed interest in macroprudential policy has characterised the aftermath of the great recession. There is not yet full agreement on what the tasks of macroprudential policy is or how it should be carried out, but there is a clear understanding that there is an important political economy dimension to it. We review some of the recent contribution on this.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 12, 2016
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Macroeconomics in the crossfire (again)

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today's election woes, has also attracted attention in the blogosphere.

By: Pia Hüttl Topic: European Macroeconomics & Governance Date: December 5, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Load more posts