I recently came across an interesting paper by future-Nobel prize winners Daron Acemoglu and James Robinson (and Thierry Verdier). It’s summarized at VoxEU here. It provides an interesting gestalt shift for thinking about the relationships between and dependence among less egalitarian sovereign states, such as the U.S., and more egalitarian states, such as the nordic countries. Allow me to explicate.
Acemoglu, Robinson, et alt, riff of a simple model, in which there are two kinds of countries: One with almost no distribution (with “cutthroat capitalism”), and one that is far more egalitarian (with “cuddly capitalism”). Suppose we observe that the cuddly country isn’t, over all, much less wealthy than the cutthroat one, but its citizens do enjoy much more security. Shouldn’t then, the cutthroat country become more cuddly?
Not necessarily, say Acemoglu, et al. Why not? The basic idea here is that, as we all know, one of the main determinants of any country’s wealth, or the world’s wealth as a whole, is its technology. Now, who produces new technology? Often, entrepreneurs. Why do they produce it? Well, presumably, at least partly because they want to get rich, and not be poor. It follows then, that, at least to some degree, countries that allow some people to become very wealthy, as by taxing and redistributing less, provide greater incentives to entrepreneurs to research, develop, and market innovative technologies. Now, the interesting thing is that technology spills over borders very easily. So most new technologies may get made by entrepreneurs in the ‘cut-throat’ society, but the benefits of those technologies will soon be enjoyed in the cuddly ones as well, which is why the cuddly society isn’t much less wealthy after all. This sounds like a good deal for the cuddly countries, but it implies that if every country were to become a ‘cuddly country,’ that overall technological progress might slow or halt, which would undermine the very basis of the cuddly countries’ cushy existence.
As you might naturally think, our two archetypal countries here are supposed to map onto the United States, on the one hand, and the Scandinavian countries on the other. So Acemoglu and Robinson et al. draw from this a kind of varieties-of-capitalism economic pluralism: we can’t all be like the cuddly countries, because if we were, nobody would have the incentives to produce the innovations that allow cuddly countries to have such a high quality life. As they put it:
“it may be precisely the more cut-throat American society, with its extant inequalities, that makes possible the existence of more cuddly Nordic societies.”
This paper, by the way, is one which, I think, is true in theory, but not in fact. And that’s not to denigrate it. Things that are true in theory can be useful, even if they’re not true in fact. The reason I don’t think this paper is true in fact are twofold. First, I think the differences in levels of equality between the U.S. and the Scandinavian countries aren’t entirely driven by policy; nor can we say the differences in absolute levels of wealth are. One obvious difference is that Scandinavian countries are pretty homogenous, whereas the U.S. is a nation of immigrants, who have come to the country at different times, assimilated at different rates, moved into different professions, etc. We’re simply more diverse in every way, and that shows up in more variation in incomes. A significant portion of income inequality in the U.S. collapses into the problem of racial inequality, and the enduring historical legacy of slavery. I also happen to think a lot America’s worst poverty is created by family disruption, and the evidence suggests that Scandinavian countries have far fewer children being raised in disrupted, single-parent homes.
Second, while, as one with some right-leaning inclinations, I might like to say America’s higher wealth is attributable to our more cutthroat capitalism, I don’t think one can safely say that this is empirically true. There are a lot of the factors in our absolute wealth advantage — our unique political history, our access to Atlantic and Pacific, our position in the great wars of the 20th century, etc., all stand out as major contributors.
More, there are various ways in which reality is more complex than the simple stereotype that “U.S.= cutthroat capitalist, low-tax, low redistribution and Europe= progressive, redistributive, quasi-socialist.” For example, if you look just at income taxes, then France appears to have a much, much more progressive tax schedule than does the U.S. But when you factor in the fact that a higher portion of their tax revenues come from value-added taxes and consumption taxes, it’s no longer so clear. There are other complexities, too: How do we weigh the taxes and redistribution of state and local governments? If you give a group or an industry a tax subsidy, does that count as a government expenditure? Depending on how you account for all of these factors, you could make the U.S. look more cuddly, in many ways, than many European nations.
But I’m confident Acemoglu, et al., know most of those things, and intended their simplified model not to fully reflect reality, but to provide us with an interesting theoretical way of interpreting it. And I think they succeed in that. The gestalt shift the paper provides suggests that ideal economic policy in part depends on your moral philosophy in a counterintuitive way: If you choose cosmopolitanism over nationalism, you should be slightly more inclined to support “cuthtroat capitalism” in your country, in order to provide the incentives to generate technological innovation that will spill over and help the world as a whole; if you choose nationalism over cosmopolitanism, you should be slightly more inclined to support “cuddly capitalism,” in order to give your compatriots a cushier life, as you all free-ride off of the technological innovations those Yankee tycoons create. In this vein, one can look at highly egalitarian countries not as super-enlightened societies that have attained a global ideal, but, rather, as technological free-riders, living off the fruit of others’ inequality.