by Ryan Streeter on September 26, 2012. Follow Ryan on Twitter.
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. We also show that domestic constraints from social democratic parties or unions may be beneficial for a country because they prevent cutthroat capitalism domestically, instead inducing other countries to play this role.
Forget makers and takers and the 47 percent and all that! We have a different type of freeloader problem here.
The authors are responding to the question that gets asked a lot by people with a healthy dose of Nordic envy: if Scandinavian countries have shown that you can have both economic growth and generous welfare benefits, why doesn’t the United States adopt a more Scandinavian type of welfare state?
Their analysis gives the answer: Nordic societies and those like them can afford a more “cuddly” capitalism because they capitalize on the innovation and progress that first begin in more cut-throat societies, such as ours. Their claim that more robust unions can flourish in such societies because the cut-throat entrepreneurship happens elsewhere is also very interesting.
There’s a lot to unpack in the paper, and I’ll look forward to seeing others pick up this line of thought and explore it a bit more.