From
the steam engine to the Internet, innovation has been the driver of
rising living standards in capitalist countries. Economist Joseph
Schumpeter wonderfully captured the role of innovation in a capitalist
economy: “The fundamental impulse that sets and keeps the capitalist
engine in motion comes from the new consumers’ goods, the new methods of
production or transportation, the new markets, the new forms of
industrial organization that capitalist enterprise creates.”
Nowhere
is the association between innovation and entrepreneurship as deeply
ingrained in popular culture as in the U.S. Starting with the textile
mill owners of 19th century Lowell, Mass., and continuing right up to
the men and women who built Silicon Valley, Americans have believed that
innovation and risk-taking are two sides of the same coin. This common
cultural touchstone helps explain why U.S. businesses have so much
leeway to succeed and fail. Taking a long-term perspective on American
history, it’s hardly surprising that a major public policy passion has
been how best to encourage more entrepreneurship. This policy concern is
certainly animating the battle for the White House between Mitt Romney
and Barack Obama.
Perhaps the current charged political climate helps explain why a 47-page, highly abstract
scholarly paper
(PDF) with plenty of equations and multiple references to world
equilibrium model, risk aversion, time-varying rewards structures, and
so on has ignited
a flurry of interest in the
blogosphere. Its title is provocative, too:
Why Can’t We All Be More Like Scandinavians: Asymmetric Growth and Institutions in an Interdependent World.
MIT economist Daron Acemoglu, Paris School of Economics professor
Thierry Verdier, and Harvard professor of government James A. Robinson
model a relationship between two forms of capitalism, “cutthroat” and
“cuddly.” The U.S. is an exemplar of cutthroat capitalism, offering
risk-takers the prospect of big money, a weak safety net, and wide
inequality. The paragons of cuddly capitalism are the Scandinavian
nations, with a generous cushion against risk, a smaller payoff to
entrepreneurs, and less inequality.
To recap the paper, the
scholars argue the cutthroat U.S. economy expanded rapidly, thanks to
incentives rewarding innovation. However, living standards among the
cuddly Nordic nations eventually catch up as they adopt the innovations
generated by U.S. entrepreneurs. Cuddly capitalism and cutthroat
capitalism rely on one another in an interconnected world economy. The
scholars conclude: “[W]e cannot all be like the Scandinavians, because
Scandinavian capitalism depends in part on the knowledge spillovers
created by the more cutthroat American capitalism.”
The paper
raises many intriguing questions. The most important for people who
aren’t academic economists is whether it’s true a stronger social safety
net discourages entrepreneurship. My suspicion is that the exact
opposite is the case. Modern finance theory—hardly a bastion of
socialist support—suggests that strong safety nets which minimize the
downside of bets gone bad encourage greater risk-taking. Without a
backstop they can rely on, “people are afraid to venture out into the
rapids where real achievement is possible,” writes Yale University
economist Robert Shiller in
The New Financial Order: Risk in the 21st Century. “Brilliant careers go untried because of the fear of economic setback.”
The story told by worldwide innovation indexes is very different than what the authors suggest,
says Lane Kenworthy, sociologist at the University of Arizona. The
Global Innovation Index
for 2012, compiled by INSEAD and the World Intellectual Property
Organization (the latter a specialized agency of the United Nations),
ranks Switzerland first,
followed by Sweden, Singapore, and Finland. The U.S. is 10th. The top
four innovation countries offer their citizens universal health and
retirement benefits. The World Economic Forum’s
Global Competitiveness Index, 2012-2013 rates Sweden the world’s most innovative nation, followed by Finland. The U.S. is sixth on the list. Closer to home, the
2012 State Entrepreneurship Index
compiled by the University of Nebraska-Lincoln put Massachusetts, which
has universal health care, on top. Louisiana is at the bottom.
A
similar insight comes from an examination of whether there is
“entrepreneurial lock” with America’s employer-based health-care system.
A 2011 Kauffman-RAND Institute for Entrepreneurship Public Policy study
looked into whether people with employer-based insurance
were more likely to become self-employed
if they could get their health insurance through a spouse. For the
entire U.S. population, the annual base rate of business creation is 3
percent. Among men, the study found that entrepreneurial lock reduced
business creation by a percentage point. The same pattern held for
women. Eligibility for universal coverage under Medicare also affected
entrepreneurship rates. For men just under age 65, the business
ownership rate is 24.6 percent, a figure that jumps to 28 percent for
men just over 65. “The availability of affordable health insurance for
the self-employed has an important impact on whether individuals are
likely to become entrepreneurs,” concludes Robert Fairlee, a RAND
economist.