Cut-throat capitalism vs. cuddly capitalism

by Ryan Streeter on September 26, 2012. Follow Ryan on Twitter.

Via Kauffman’s Growthology blog, we learn of this new academic paper by Acemoglu, Robinson and Verdier. This is fascinating:

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.