42. Can't We All Be More Like Scandinavians?

A very interesting explanation of inequality is in this article:
Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World"  It is written by some of the best economists - the first author will get a Nobel prize one day.

Here is the abstract:

In an interdependent world, could all countries adopt the same egalitarianism reward structures and institutions? To provide theoretical answers to this question, we develop a simple
model of economic growth in a world in which all countries benefit…t and potentially contribute
to advances in the world technology frontier. A greater gap of incomes between successful and
unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence
a country’s contributions to the world technology frontier. We show that, under plausible assumptions, the world equilibrium is necessarily asymmetric: some countries will opt for a type of
“cutthroat” capitalism that generates greater inequality and more innovation and will become
the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and
choose a more “cuddly”form of capitalism. Paradoxically, those with cuddly reward structures,
though poorer, may have higher welfare than cutthroat capitalists— but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of
capitalism. We also show that domestic constraints from social democratic parties or unions
may be beneficial for a country because they prevent cutthroat capitalism domestically, instead
inducing other countries to play this role.

An explanation in more accessible language:
As is the case with economists, they build a model. The model attempts to explain why some countries have cutthroat capitalism - see the previous posting - and some are more equal (for example Scandinavian countries). Main points:

There are two types of countries. Type A are unequal, with cut-throat capitalism (think US). Type B are more equal, with cuddly capitalism (think Scandinavian countries).

• the bigger the rewards to successful entrepreneurs, the greater is the incentive to innovate. This means that in type A countries there is more innovation.
• in type B countries rewards to successful entrepreneurs are smaller so those countries  innovate less. Instead they adopt innovation from the type A countries. 
• Type B countries are free-riding: they wait until a type A country invents something (which is expensive) and imitate it (which is cheaper).
• Type A countries are technological leaders and so are richer; type B countries are technological followers and so are poorer.
• But type B countries, while poorer, are more equal and so they are better off.

Can anything be done about it? Yes, but it is not a good idea. If type A countries become more like type B countries, world economic progress will slow down and in the long run everyone will be worse off.

Clicking this link will download the article