Saturday, October 20, 2012

Research paper of the day: Can’t We All Be More Like Scandinavians?

Fascinating new paper from the same people who brought us
Why Nations Fail: The Origins of Power, Prosperity, and Poverty   .    

The new paper is called "Can't we all by more Scandinavian?"  This paper outlines reasons why we can't all be like Norway with its high standard of living and comprehensive welfare state which in technical terms is called "cuddly capitalism".  The paper argues that for some nations to have "cuddly capitalism" others need to have a more harsh social policy that has stronger incentives for work and innovation.  We use the technical term "cut-throat capitalism" to classify these nations.  In simple terms the authors argue that the cut-throat nations are the ones that expand the technological frontier for the world and then the "cuddly" nations use the innovation and progress to ensure that they maintain a high standard of living.

Needless to say this is a rather controversial argument.  I personally have always wondered if a bigger welfare state in the US might encourage more people to be more entrepreneurial since they would be able to fall back on a safety net if the business fails.  Although Americans don't have the same social pressures about failure that we see in most the rest of the developed world, the financial cost to a failed business are substantial and can lead to a level of poverty that is almost impossible to achieve in Scandinavian society.

Mark Thoma has a great overview of the issues and is generally awesome so check his post out if you want to learn more.

So what do you think?  Does our cut-throat capitalism lead to a level of innovation and progress that we would otherwise be unable to achieve?  Are Scandinavians essentially getting a free ride due to the more harsh form of capitalism we practice in the US?  Could an improved social safety net actually more the US more innovative?  These are the questions that caused me to start studying economics and pushed me towards going to grad school.  I'm not sure if there is an answer to these questions but I have a feeling I might be spending a rather large amount of the rest of my life to figure it out.