Friday, November 1, 2013

Billionaires in Sweden?

Matt Yglesias has a "must read" article on why does Sweden, home of cuddly socialism, have so many billionaires.  In some ways the cuddly socialism makes it possible to have a much more vicious market economy.  Putting people out of work in the name of efficiency is far less resisted if there are assurances that they will still end up with food, shelter, and health care.

But there is another argument that I want to focus on.
This reality cuts against a recent critique of the Nordic social model from Daron Acemoglu, James Robinson, and Thierry Verdier that was popular in right-of-center circles. The authors contrasted American-style cutthroat capitalism with Nordic-style cuddly capitalism as two social systems that are compatible with high levels of GDP per capita. The cuddly Nordic system might be better for human welfare, they said, but the American system is better for the world. Their reasoning was that high levels of inequality create financial incentives for innovation; cuddlier nations don’t have those incentives. The authors test this rather schematic model empirically by showing that the U.S. files more patents per capita than any of the egalitarian Nordic countries.

Now followers of this blog will know that we consider the patents-innovation link to be nonsense.  It is as much a matter of the legal structure of the country in question as it is a marker for innovation (and excessive patents create more opportunities for lawsuits, which rarely improve corporate performance). 

But the real tricky piece is calling the American system "better for the world".  I grow tired of argument, offered without exceedingly strong proof, that current business practice just happens to be all about altruism.  After all, the current system also happens to be shifting a lot of wealth into a fairly narrow social class.  Is that also all about altruism?  Or, like Sweden, is it about having a tournament system of business rewards? 

The real question is about the counter-factual.  Would a cuddly form of capitalism really result in less innovation overall? 

Now it is possible that Sweden (and other Nordic countries) have unique advantages that may not be replicated elsewhere.  But let's engage that argument directly, rather than resort to appeals to "we suffer for the sake of everyone" type red herrings. 

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