Where does innovation mostly come from? It disproportionately comes from economies where "incentives for workers and entrepreneurs results in greater inequality and greater poverty"

See U.S. Can't Import the Scandinavian Model by Megan McArdle.

"Ah, Scandinavia, Nordic paradise. Nowhere else seems to so easily combine a very progressive welfare state with high levels of growth. It's no surprise, then, that it is the darling of international indices of everything from happiness to prosperity.

In vain do the more libertarian-minded rejoinder that Swedes have the same poverty rate in America as in Sweden, that small homogenous countries are probably better able to support a cradle-to-grave welfare state than large, heterogenous ones, that tiny countries are more likely to generate outlying results than bigger ones (which looks fantastic if you drop the outlying underperformers from your sample), and that however splendid Norway may be, "tiny population nestled atop huge fossil fuel deposits" is probably not a strategy that the U.S. can emulate. What are you gonna believe -- some long-winded explanation, or this simple number that's right in front of your eyes?

Dan Drezner makes another point, however, that is not raised often enough: There's reason to think that the Scandinavians may be able to pair their high levels of government spending with a decent growth rate precisely because the U.S. does not follow their lead. 

Let me explain. In the simplest terms, economic growth is population growth, plus productivity growth. How do nations get more productive? Well, one way is to find a lot of lucrative fossil fuel deposits in the North Sea. But let's accept that this is not going to be a widespread ticket to prosperity. Most of the way we get more productive is to innovate in some way (and indeed, the technology that discovered and recovered the Norwegian oil is itself an innovation.)

Where does innovation mostly come from? Daron Acemoglu, James Robinson and Thierry Verdier, the academics whom Drezner cites, argue that it disproportionately comes from economies where "incentives for workers and entrepreneurs results in greater inequality and greater poverty" . . . i.e., the United States. Those innovations, however, don't make just us more productive; they filter out to the rest of the world.

Now, you can quarrel with the academics' model, and indeed, many people have. But even if you think they are wrong about needing inequality-producing incentives to drive innovation, there remains a kernel of truth: When it comes to growth, Scandinavia's economic policy simply doesn't matter as much as U.S. economic policy, so it's hard to draw good lessons from it for other, larger countries.
Globally, this is simply obviously true, but even locally, it will always be the case that most of the innovations that drive Scandinavian growth will have to come from outside their borders, simply because their populations are so tiny compared to the hundreds of millions of other rich-world people who are living on the current innovation frontier. It is also true that their economies will be far more vulnerable to things that happen elsewhere -- witness the problems the Norwegian economy is experiencing as oil prices decline (thanks to the North American shale oil revolution, and the response it triggered from OPEC).  In other words, the government can really screw things up, if it wants to, but it can't likely meaningfully increase the rate of growth above the level of innovation that the global system will support.

And if you think that Acemoglu, Robinson and Verdier are right, then Scandinavia simply doesn't need to focus on innovation, as long as the United States is willing to carry that weight. Which suggests that the Scandinavians may be crazy like a fox. But that doesn't mean that the rest of us can join them in the henhouse."