Thomas Edsall reviews a debate in the NYT's Opinionator:
“We cannot all be like the Nordics,” Acemoglu declares, in a 2012 paper, “Choosing Your Own Capitalism in a Globalized World,” written with his colleagues James A. Robinson, a professor of government at Harvard, and Thierry Verdier, scientific director of the Paris School of Economics.
If the “cutthroat leader” – the United States — were to switch to “cuddly capitalism, this would reduce the growth rate of the entire world economy,” the authors argue, by slowing the pace of innovation.
Acemoglu, Robinson and Verdier put their argument technically, but there is no mistaking the implications:
We consider a canonical dynamic model of endogenous technological change at the world level with three basic features. First, there is technological interdependence across countries, with technological innovations by the most technologically advanced countries contributing to the world technology frontier, on which in turn other countries can build to innovate and grow. Second, we consider that effort in innovative activities requires incentives which come as a result of differential rewards to this effort. As a consequence, a greater gap in income between successful and unsuccessful entrepreneurs increases entrepreneurial effort and thus a country’s contribution to the world technology frontier. Finally, we assume that in each country the reward structure and the extent of social protection shaping work and innovation incentives are determined by (forward-looking) national social planners.
In a series of e-mail exchanges with the Times, Acemoglu said he believes that safety net programs in the United States are inadequate. But, if the thesis that he has put forth is correct, there is room for only modest expansion:
The fact that the United States is the world technology leader puts constraints and limits on redistribution at the top. The global asymmetric equilibrium is at the root of the United States being the world technology leader, but the mechanism through which this matters for innovation and redistribution is the very fact that the United States is such a leader.
In our model (which is just that, a model), U.S. citizens would actually be worse off if they switched to a cuddly capitalism. Why? Because this would reduce the world’s growth rate, given the U.S.’s oversized contribution to the world technology frontier. In contrast, when Sweden switches from cutthroat to cuddly capitalism (or vice versa), this does not have an impact on the long-run growth rate of the world economy, because the important work is being done by U.S. innovation.
These findings, if substantiated, will disappoint those who long for a Swedish-style mixed economy with universal health care, paid maternal leave, child allowances, guaranteed pensions and other desirable social benefits.
Some pushback from Lane Kenworthy can be found here.