Bringing the State Back In (to the discussion on redistribution and innovation)

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In recent months, the New York Times has published a series of opinion pieces that read like an abbreviated syllabus in comparative political economy. An analytic piece from late April chronicling the (perhaps) excessive generosity of Danish social democracy kicked off the discussion, prompting a response from Nancy Folbre as well as a “Room for Debate” roundtable on the sustainability of continental welfare states. The Folbre piece linked above makes brief reference to a recent(ish) paper by Acemoglu, Robinson and Verdier (ARV) which argues that while some countries may be able to combine robust welfare states with sustained economic growth, all countries can’t do so at the same time without retarding global innovation rates. They explain their argument succinctly in the short version of their piece:

The fact that technological progress requires incentives for workers and entrepreneurs results in greater inequality and greater poverty (and a weaker safety net) for a society encouraging more intense innovation. Crucially, however in a world with technological interdependence, when one (or a small subset) of societies is at the technological frontier and contributing disproportionately to its advancement, the incentives for others to do so will be weaker. In particular, innovation incentives by economies at the world technology frontier will create higher growth by advancing the frontier, while strong innovation incentives by followers will only increase their incomes today since the world technology frontier is already being advanced by the economies at the frontier.

America: enduring child poverty and substandard education so you don’t have to. You’re welcome, Sweden.

Thomas Edsall has a piece from April evaluating this argument in light of some countervailing claims, and it’s well worth a read. Whether redistributive incentives are really the key driver of cross-national innovation rates deserves serious critical scrutiny. It’s also worth thinking in normative terms about whether one might tolerate a slower iPhone development cycle (or even – gasp – a lack of iPhones altogether) for the sake of greater social equity.

That aside, however, the ARV model seems plausible. Anyone who has dug a bit into the literature on Varieties of Capitalism will recall the basic claim about innovation: both ‘cutthroat’ liberal market economies (LMEs) and ‘cuddly’ coordinated market economies (CMEs) innovate, but do so differently. LMEs, with their flexible labor markets and ubiquitous-but-impatient venture capital, make radical technological leaps, while CMEs are better at incremental advances. America develops the Fordist production system, Germany makes cars that don’t suck. The ARV model takes this observation to its logical conclusion: CME incrementalism relies on LMEs to expand the technological frontier. For those of us who would like to see a more robust safety net and more egalitarian distribution of post-transfer income, this is discomfiting.

I don’t have anything close to the formal chops necessary to critically evaluate the technical specifics of the ARV model. I would, however, make two observations about its real-world importance and applicability. First, as the authors briefly acknowledge, people have tried to test some of the implications of their thesis. Taylor (2004) and Akkermans, Castaldi and Los (2007) both use patent data to compare innovation rates between “cutthroat” LMEs and “cuddly” CMEs. The former article finds no discernible difference between them, while the latter finds limited and industry-specific support for the notion that LMEs innovate the fastest and/or most radically. ARV do cite both of these efforts, but don’t really address the complications they present to their central argument.

Second, and more crucially, much of the discussion around this question ignores the state’s potential to drive innovation through direct investment in science. ARV treat innovation as a function of incentive structures facing potentially innovative individuals or firms. “Cutthroat” economies, with their looser regulation and weaker redistributive regimes, provide innovators with stronger incentives to invest capital in risky-but-potentially-innovative ventures. State investments in R&D, though, could plausibly drive innovation on the supply side by providing resources in a manner divorced (or at least estranged) from market pressures.

To cite a few well-worn American examples, many of the technological advances crucial to the twenty-first century economy happened outside the private sector. The first general-purpose computer was developed to calculate artillery firing tables for the U.S. Army. The microprocessor was developed by NASA in order to miniaturize computers for guidance and navigation during the Apollo program. The packet switching network that became today’s internet was first developed by ARPA (now DARPA), an advanced research agency within the Pentagon. Today, the National Institutes of Health commits a budget of roughly $30 billion per year to biomedical research, including the kind of risky basic research that may not generate immediate commercial returns, but can lead to radical innovations over time. The NIH alone represents almost a third of the money spent on health research in the United States, and is likely the reason that America is a leading innovator in this sector. The National Science Foundation commands another $7 billion to fund research across scientific disciplines (with one, ahem, notable exception). More trivially, that self-driving car that Google has been promoting like mad recently? It also has its roots in a series of DARPA initiatives.

I don’t mean to suggest that the private sector doesn’t drive a substantial majority of innovation in contemporary developed economies. Even the NIH budget, colossal by any standard, represents less than half the capital devoted to biomedical research in the United States. Nor is all state-funded research created equal. Some work suggests that state subsidies of private sector R&D initiatives may crowd out, in whole or in part, private investment in similar projects (a cursory lit review indicates mixed evidence on this score). Still, if the concern is that more egalitarian societies might de-incentivize the kinds of risky bets that lead to radical technological leaps, that effect could be at least partially offset by direct public investment. It may yet be possible to subsidize school lunches without gutting technological progress.

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