Posts Tagged ‘Paris School of Economics’

328

“Software (Google and Amazon), hardware and design (Apple), social networking (Facebook and Twitter), biotech, pharmaceuticals, robotics, nanotechnology, entertainment and retail (Wal-Mart)” – these are the bedrocks of modern capitalism. And without high rewards for the innovators – the people who broke the mould and gave us great new innovations – the rest of us would still be living in the Stone Age, or at least we would be poorer than we are, or so says Daron Acemoglu from MIT.

The US could become a lot more equal and a fairer place, but the rest of us, with our more liberal views would be the losers. Is that right? Can the more cuddly and idealist parts of this world only survive thanks to the more cut-throat and harsher realities of the US system?

“The United States does not have the type of welfare state that many European countries, including Denmark, Finland, Norway and Sweden, have developed, and despite recent health-care reforms, many Americans do not enjoy the type of high-quality health care that their counterparts in these other countries do. They also receive much shorter vacations and more limited maternity leave, and do not have access to a variety of other public services that are more broadly provided in many continental European countries.

Perhaps more importantly, poverty and inequality are much higher in the United States and have been increasing over the last three decades, while they have been broadly stable in Denmark, Finland, Norway and Sweden,” or so says Daron Acemoglu from MIT; James A Robinson from Harvard, and Thierry Verdier from the Paris School of Economics in a paper published last year. See: Can’t We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World 

But, continues the paper: “American society that makes possible the more cuddly Scandinavian societies based on a comprehensive social safety net, the welfare state and more limited inequality. The basic idea we propose is simple and is developed in the context of a canonical model of endogenous technological change at the world level.

The main building block of our model is technological interdependence across countries: technological innovations, particularly by the most technologically advanced countries, contribute to the world technology frontier, and other countries can build on the world technology frontier. We combine this with the idea that technological innovations require incentives for workers and entrepreneurs.”

Okay, so that is what the paper says. To put it more succinctly, the US does appear to be more innovative than, say, Scandinavia, with more patents per head for example. So maybe we should all be grateful that the US system is so ruthless.

But here is an alternative, point of view. In his book ‘Sex, Science and Profits’, Terence Kealey quoted Robert Stephenson who said: “The locomotive is not the invention of one man but of a nation of engineers,” and the industrialist A J Mundella, who said: “Every invention we have made and patented (and some have created almost a revolution in the trade) has been the invention of overlookers, or ordinary working men, or skilled mechanics, in every instance.” In short, it was not the case that that the great innovations have been down to highly remunerated entrepreneurs; rather they have often been down to ordinary folks on the payroll, who received little more than a pat on the back for their troubles.

There is one other downside to a system in which there is a massive gap between, say, the top 5 per cent and everyone else. Because doctors often fall into the top 5 per cent in terms of ability and certain exam results, it means that society as a whole struggles to be able to pay for its doctors. If doctors earned less, the NHS would be easier to fund. But if they did, maybe there would be fewer doctors to go around.

Maybe the authors of this report have causation the wrong way round. Sure the US may be more innovative than Scandinavia and less equal, but does that mean one caused the other.

Maybe the US is innovative because it has different attitudes to failure, and its system gives greater scope for experimenting.

For every entrepreneur who makes it big, there are many who fail abjectly, and maybe they fail because they were just unlucky. The difference between those who make it and those who don’t may be as much down to luck as pure ability or hard work.

In any case, there is lots of research to show that money is not the main driver of either entrepreneurs or indeed inventors.

And yet there is something irrational about us all. Why is that more people enter the lottery when the prizes are bigger, even though the chances of winning are not affected? Do you really care if you win £5 million or £30 million on the lottery? Would it really make much difference to your happiness? Yet more of us take part when the prize money is for the bigger amount.

It may be irrational; it may unfair; it may not really add up, and it may not apply to us all of us, but the thing that drives many entrepreneurs to take massive risks, and work through the night, night after night is the promise of great riches. Maybe Messrs Acemoglu, Robinson and Verdier have a point.

© Investment & Business News 2013