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Positive Externalities: “CutThroat” or “Cuddly” Capitalism?

by Elaine Schwartz    •    Jun 30, 2013

Having just enjoyed several weeks in Paris, a friend of mine returned to the US with huge applause for the French health care system. Several days later, she was delighted to see Robert Frank’s NY Times column, “What Sweden Can Tell Us About Obamacare.”

As an economics teacher, I always think and sometimes cannot resist asking, “What is the cost?” Please note that by cost, I mean sacrifice. Because we have a limited supply of land, labor and capital, more healthcare means less of something else.

But…less of what?

Economists Daron Acemoglu, James Robinson, and Thierry Verdier have one possible answer. In a 2012 paper, they speculate that nations with “cutthroat capitalism” are much more likely to propel the world’s progress because greater income gaps create entrepreneurial incentives. By contrast, countries with a “cuddly” form of capitalism become free riders. They enjoy the technological progress that others have made possible.

As a result, they suggest that the world might not be a better place if all countries have huge social safety nets. Somewhere, capitalism needs to drive people to create the innovations that fuel GDP growth. This means that if everyone were to become like the Scandinavians, then the world would have less affluence. With less affluence, fewer countries would be able to afford their social safety nets.

In other words, the authors hypothesize that “cutthroat capitalism” generates the positive externalities that benefit the well being of the entire world. So, when my friend and Robert Frank compliment the healthcare offered by France or Sweden, perhaps they could mention that the cost might be more of the innovation and affluence that sustain social safety nets.

Your opinion of the correlation between work hours and patents in the two following graphs?

Annual average hours works. Source: OECD (2010)

Annual average hours works. Source: OECD (2010)

Patent filings per million residents at domestic office. Source: World Intellectual Property Organization

Patent filings per million residents at domestic office. Source: World Intellectual Property Organization

Sources and resources: Providing perfect ammunition for both sides of the welfare state debate, the Acemoglu, Robinson, Verdier paper (the source of the above graphs) has reservations while Dr. Frank expresses more enthusiasm. You might also want to see a slightly different view of capitalism in Good Capitalism Bad Capitalism by William Baumol, Robert Litan and Carl Schremm.

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