Choosing your own capitalism in a globalised world? Cuddly or cut-throat?

A super column from the super duo-  Acemoglu and Robinson.

They compare the two capitalism systems of US and Nordic economies. The point is both the systems are useful in their own way. US with its cut throat capitalism model leads the way allowing the Nordics to be followers and more welfare oriented (cuddly):

The main result of this theoretical investigation is that, in the long run, all countries tend to grow at the same rate, but those with cuddly reward structures are strictly poorer. Notably, however, these countries may have higher welfare than the cut-throat leader; in fact if the initial gap between the frontier economy and the followers is small enough, the cuddly followers will necessarily have higher welfare because of the greater social insurance that their institutions provide. Thus, our analysis confirms the intuition that all countries may want to be like the Nordics with a more extensive safety net and a more egalitarian structure.

Yet the main implication of our theoretical framework is that we cannot all be like the Nordics! Indeed it is not an equilibrium choice for the cut-throat leader, the US, to become cuddly. As a matter of fact, given the institutional choices of other countries, if the cut-throat leader were to switch to such cuddly capitalism, this would reduce the growth rate of the entire world economy, discouraging the adoption of the more egalitarian reward structure. In contrast, followers are still happy to choose an institutional system associated to a more egalitarian reward structure. Indeed, this choice, though making them poorer, does not permanently reduce their growth rates, thanks to the positive technological externalities created by the cut-throat technology leader. This line of reasoning suggests therefore that in an interconnected world, it may be precisely the more cut-throat American society, with its extant inequalities, that makes possible the existence of more cuddly Nordic societies.

Interesting as always..

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