Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

American Economic Leadership and European Dynamism

by TGeraghty Tue Feb 13th, 2007 at 02:14:22 AM EST

from the diaries. -- Jérôme

Nobel laureate Edmund Phelps is at it again (free), writing in the Wall Street Journal about Europe's alleged "culture of poverty" and lack of economic dynamism.

I responded to Phelps's views on ET here and, with much the same information, on Mark Thoma's Economist's View reader's blog here.

However, Phelps made the following comment in his current WSJ piece that I think is worth considering in greater depth:

the Continental economies began to be underperformers in the interwar period, and have remained so . . .

I think this is wrong, and thinking about why it is wrong may help us to understand better the sources of American economic leadership and what, if anything the European social model has to do with it.


First of all, let's look at the historical path of labor productivity across countries, relative to the UK (right-click on the image to see it better):

Now, let's ignore for the moment that labor productivity (output per hour) is not necessarily the best measure of "economic leadership." Phelps uses it as evidence for his views so let's play on that end of the field.

The chart should make it clear that US economic leadership measured by labor productivity long pre-dates the European social model. It begins in the mid-19th century and peaks in about 1950. (In terms of timing, in fact, the existence of the European social model coincides with the only period of extended catch-up Europe has enjoyed since about 1820).

Where did this US productivity advantage come from?

Development economists often point to a general set of "social capabilities" -- efficient labor and capital markets, openness to trade and new ideas, political institutions that promote productive investment, growth, and innovation while minimizing rent-seeking -- shared by successful economies. But to the extent that European economies seem to be relatively successful, for the most part we must assume they share many of these characteristics (more on this later).

So then what, specifically, has the US productivity advantage been built on?

The "Mass Production" Economy (1870-1950)

As far as I understand it, the usual story focuses on three factors:

  1. A Large, Unified Domestic Market
  2. Access to Cheap Natural Resources
  3. Technological Creativity and Organizational Capability in Mass Production and Distribution

Considering these in turn:

Large, Unified Domestic Market. In addition to rapid population growth, the US economy has benefited from a degree of integration that was, until recently, impossible for Europe to match. The US been a large free-trade area since the ratification of the Constitution, which specifies that only the national government can regulate economic activity that crosses state lines. Furthermore, the US has long enjoyed a common language, a unified national monetary system, and common technological standards for transportation and energy that have further integrated the national economy (with the exception of the Southern states until the post-WWII period). The large well-integrated economy smoothed the workings of US product, capital, and labor markets, improving resource allocation and allowing much greater scope for exploiting scale economies in production and distribution.

Access to Natural Resources. On the eve of World War I the US was the world's top producer of an extraordinarily broad range of economically useful raw materials, from natural gas (95% of global production) to petroleum (65%) to coal (39%) and iron ore (36%). This abundance was not simply the result of divine providence, but also of innovation in extraction technology and transport investments that linked resource producing areas with industrial centers, themselves driven by the large potential profits made possible by the large integrated national market.

Technology and Organization. Finally, the US pioneered efficient mass production technologies, mass distribution techniques, and the hierarchical management structures to run them in sectors like steel, food processing, office equipment, automobiles, and home appliances. Again, the large potential market provided strong incentives to exploit economies of scale. Further, mass-produced goods tended to be highly resource-intensive, and so the three legs of America's economic advantage were in reality closely interlinked. Finally, the nature of mass production techniques made them difficult to transfer across firms, let alone national boundaries. Learning curves were steep. Productivity improvements came from experience and small changes to existing systems. They were industry and plant specific. Thus, first-movers (firms, industries, whole countries) could maintain a long-term productivity lead.

So what does all of this have to do with the European social model?

Certainly, the heyday of US economic leadership from 1900 to 1950 can't have had much to do with the European social policies that mostly didn't exist when the US built that lead. To reiterate, Europe's key problem was that it was split up into a bunch of relatively small countries with different languages, currencies, technological standards, etc. In that environment, big investments in mass production and mass distribution just didn't make sense.

The "High-Tech" Economy (1950-1990)

What about post-1950?

The main story since World War II has been one of relative American, not European decline. European labor productivity levels have more than doubled since 1950. So clearly something changed that allowed European economies to catch up to US levels of productivity.

One thing that happened was that US producers in mass production industries like steel and automobiles lost their entrepreneurial edge. They became bureaucratic oligopolies used to orderly growth, coordinated pricing, weak competition, and easy profits. Management structures became oriented to labor control and short-term financial targets rather than innovation. Meanwhile, foreign competitors were developing the new products and processes that revolutionized these sectors beginning in the 1970s. The American "culture of dynamism" did not help much here.

More charitably, historical patterns of development may create a sort of inertia that reduces incentives to make investments in new technologies. Any firm, industry, or nation’s capital stock embodies technological systems comprised of intricate webs of interlocking elements. Modernizing one piece of the system may require more costly changes elsewhere in the system that may be difficult to coordinate across firms or industries. Nineteenth century Britain, with its steam-powered textile and iron manufacturing complex may provide one such example; American resource-intensive mass production with its highly specialized single-purpose machinery and tight vertical integration, may have been another.

Another factor behind the European resurgence was the changing nature of technology. New, science-based "high-tech" sectors like aircraft, aircraft engines, chemicals, computers and information technology and biotechnology are far less respectful of national boundaries than were the old mass production techniques (which, as it turned out, were not that easy to hold onto either). Here, progress is based on organized research and development and the availability of key technical personnel. More of the knowledge is in the public domain ("nonrival goods"). Such techniques are easier to copy.

The key to progress in high-tech is investment -- in R&D (not just private, but also public), and in the education of scientific and technical personnel. Here, too, at least up until the 1960s the US led the way. In the mid-1960s the US invested more than twice the percentage of GDP in research and development, and employed three times the number of scientists and engineers in R&D, as did its closest European and Asian rivals. The US had led the world in high school and college graduation rates going back to the 19th century, creating a cadre of trained people that could serve as managers, scientists, and engineers. The GI Bill sent even more Americans to college and precipitated a vast expansion of state university systems. Further, public institutions like the Defense Department, the National Institutes of Health, the National Science Foundation, and NASA enlarged the market for scientists and technical people and developed new technologies with civilian applications.

American preeminence in computers and information technology is a prime example of this virtuous cycle, combining traditional American strengths with these new public-private investment partnerships. Government subsidy --  for training scientists and engineers, and to purchase the resulting output -- stimulated early entry of US firms. Once established, the large US domestic market for hardware (mainframes, then later PCs) stimulated demand for semiconductors and software. Antitrust and intellectual property rights law protected innovative new firms.

Nonetheless, Japanese and European producers made gains in high tech sectors in the 1970s and 1980s. Japanese and European investment in human capital and R&D began to approach or even surpass US levels by the late 1980s. Not surprisingly, the initial American lead was harder to hold onto, and by 1990 the US was importing more high-tech goods than it was exporting.

So, the story of global economic leadership from 1870 to 1990 seems to go something like this:

  • The US builds a long-term lead based on mass production between 1870 and 1950; the lead persists long-term because the techniques are hard to copy;

  • The US builds an initial lead in high-tech sectors after 1950 based on large-scale public and private investments in human capital and R&D;

  • Europe (and Japan) catch up to American productivity levels due to (a) the US dropping the ball in mass production sectors and (b) ramping up investments in human  capital and R&D in both mass production and high-tech sectors.

Again, I don't see where the European social model, or labor market model, or financial system model played any negative role whatsoever in any of this. When the US built its lead, most of these institutions didn't exist. Later, these institutions not only did not prevent Europe (nor Japan with its "flexible rigidities" -- main banks, keiretsu, lifetime employment systems, etc) from catching up to the US after 1950, they may have played an important facilitating role (see, e.g., Barry Eichengreen's new book on European coordinated capitalism).

The Last 15 Years

Therefore, all of the argument as to the inappropriateness of Europe's economic and social model rests on developments in the last 10-15 years. Yes, European unemployment has been high, although job creation has picked up of late. Yes, European productivity growth has been slow since 1995, although  the most recent (tenuous) evidence seems to be more optimistic for the European economy.

In long-term perspective, however, the argument that the European economy cannot continue to match US levels of productivity and economic growth rests on rather weak foundations. The days of any nation maintaining an essentially insurmountable long-term economic advantage are long gone due the non-rivalrous nature of modern technology. A key to success is innovation and investment in research, development, and human capital development. As the Scandinavian countries show, such investments can be entirely compatible with very generous levels of social spending. Also, organizational innovation that stresses flattening out hierarchies and pushing decision-making down toward employees also seems to be important for unlocking the benefits of modern information technology, and here Europe, with its strong labor movements and institutional mechanisms of close collaboration between workers, firms, and the state in economic policy, corporate governance, and human capital development, would actually seem to be quite well-positioned to develop this type of economic organization. The single market, for all its faults, should also help the European economies reap more of the gains of scale and market integration that have historically benefited the US economy.

Perhaps the critics have a point that unnecessary or counterproductive product- or labor-market regulations need to be given a closer look. But overall these should be seen for what they are -- not a complete dismantling of, but rather minor adjustments to a system that for the most part has and will continue to work pretty well to reconcile a dynamic, growing economy with the demands of social justice.

And of course the left should not stop thinking about ways to broaden and deepen worker and citizen power and security in ways that complement innovation, efficiency, and sustainability.

Display:
Finally...the TGeraghty article drought has ended! Great!! And thanks for your continued fight against the "US economy is better than European economy" meme!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Tue Feb 13th, 2007 at 03:27:49 AM EST
Great Post. It's lovely to see an analysis that actually looks at the history seriously. Phelps should be ashamed of himself.

On minor nit:

Access to Natural Resources. On the eve of World War I the US was the world's top producer of an extraordinarily broad range of economically useful raw materials, from natural gas (95% of global production) to petroleum (65%) to coal (39%) and iron ore (36%). This abundance was not simply the result of divine providence, but also of innovation in extraction technology and transport investments that linked resource producing areas with industrial centers, themselves driven by the large potential profits made possible by the large integrated national market.

I think that nations like Japan and Germany would end up laughing hollowly at the bit I highlighted. Given that they got involved in major conflicts largely because they had serious shortages of raw materials needed from industrial expansion.

Innovation in resource extraction is a good and useful thing, but if you have to invade a region before you extract, it doesn't matter how innovative you are, it's still going to cost you more.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Feb 13th, 2007 at 03:46:30 AM EST
of the Phels article:

Yesterday's Open Thread
Yesterday's Salon

Many of us have noticed that "steamy pile of bollocks" (to quote Colman)...

btw, I think the link is actually accessible to non-subscribers.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Feb 13th, 2007 at 04:34:03 AM EST
The weakness of these values on the Continent is not the only impediment to a revival of dynamism there. There is the solidarist aim of protecting the "social partners"--communities and regions, business owners, organized labor and the professions--from disruptive market forces. There is also the consensualist aim of blocking business initiatives that lack the consent of the "stakeholders"--those, such as employees, customers and rival companies, thought to have a stake besides the owners. There is an intellectual current elevating community and society over individual engagement and personal growth, which springs from antimaterialist and egalitarian strains in Western culture. There is also the "scientism" that holds that state-directed research is the key to higher productivity. Equally, there is the tradition of hierarchical organization in Continental countries. Lastly, there a strain of anti-commercialism. "A German would rather say he had inherited his fortune than say he made it himself," the economist Hans-Werner Sinn once remarked to me.

Those things called weaknesses above are exactly what I would want in a society. I think Phelps is almost being a bit too optimistic here. If one compares to the US, of course Europe looks good on these points, but this is from comparing to a country that typifies all the worst of unfettered markets and cow-towing to business interests over those of the workers. These sorts of things happen in Europe as well. We have our own band of neoliberal economic enthusiasts that seem to prevail in particular in places like the European Commission, so the optimism and enthusiasm of Phelps on this point cannot be entirely shared. We must carefully guard and strengthen these important European values to defend against the neoliberal attack so well supported by powerful corporate interests. But seriously, Phelps, where is it that you argue why it is that Europe should want more 'dynamism' and less concern for 'solidarist aims'? All you offer us in your article is assertions of Europe's inferiority in this, but nothing about why we should want it. Why is 'dynamism' to be preferred over 'solidarist aims'? Why? And why is it that you don't even bother making an argument for it? Surely this is a point of legitimate debate about what sort of societies we would like to live in, one where we as people, as citizens, have a stake, and a right to make a decision about how we want to live. You offer us very little to convince us that your vision for society is one we should agree with, in fact no argument is made, 'dynamism' is simply assumed to be already agreed to be more important that all those other things you mention. I disagree, however, and so do others, and we assert our right to disagree. Economics is not inevitability, it is always political economics, about choices of what kind of a world we want to live in. Thus, what you have here, Mr. Phelps, is an opinion, which I do not share. Unfortunately you seem to like the intellectual integrity to note it as such, and thus you succumb to the all to common mistake of phrasing it as an inevitable objective analysis.

In general, quibbling about what 'growth' levels, what 'productivity' measures, and what other economic indicators are, have been, and what their development ought to be is always, necessarily political. There is not neutral ground here. The most important argument is not whether or not this analysis is factually correct or what its failings might be in that area, but if it is politically desirable. Thus I would like to hear why exactly it is that we should want the sort of economic system that you favour.

In my earlier work, I had organized my thinking around some intellectual currents--solidarism, consensualism, anti-commercialism and conformism--that emerged as a reaction on the Continent to the Enlightenment and to capitalism in the 19th century. It would be understandable if such a climate had a dispiriting effect on potential entrepreneurs. But to be candid, I had not imagined that Continental Man might be less entrepreneurial. It did not occur to me that he had less need for mental challenge, problem-solving, initiative and responsibility.

Again, I don't see how this could be more a question of "mental challenge, problem-solving, initiative and responsibility", than which areas we consider important to study, which problems we see, and which ones we deem necessary to solve, in which areas initiative should be taken, and for what, and how and to what end, we take must take responsibility. The important thing is the determination of which problems to solve, not the final quantity of problems identified and solved. This process is of course political. Why is it that we should favour 'entrepreneurism' over 'solidarism', or 'consensualism'?

The most basic point to carry away is that the empirical results related here lend support to the Enlightenment theme that a nation's culture ultimately makes a difference for the nation's economic performance in all its aspects--productivity, prosperity and personal growth.

This would be 'personal growth' as opposed to 'communal growth', would it? Something like, the 'European model' (culture?) does not favour to a great enough extent the ability of a few select to become fabulously wealthy? Yes, I am making a lot of assumptions here, but only because you are so short on the details yourself. So why is it that the 'personal' should be privileged to the 'communal'? Why don't you even bother to make an argument for this? Do you not believe it is a legitimate political question, one which ought to be determined by the democratic powerbase of 'the people', which we so celebrate in our democracies? Please engage this debate in a meaningful way, and no, a simple assertion is unlikely to sway at least my opinion.

It was a mistake of the Continental Europeans to think that they expressed the right values--right for them. These values led them to evolve economic models bringing in train a level of economic performance with which most working-age people are now discontented. Perhaps the way out--to go from unsatisfactory performance to high performance--will require not only reform of institutions but also a cultural shift that returns Europe to the philosophical roots that put it on the map to begin with.

And what would those 'philosophical roots' be, exactly? You mean like back in the good old days when people in Europe got 'growth', and 'prosperity', and had the sense and decency to pursue them to the exclusion of all other values? Like colonialism? A respectable 'make a buck, steal a buck' approach to life? I am sorry, but I think we have made progress, that those were not the good old days, and that yes, there are many, many things more important than some vague and ill-defined 'dynamism' which is undoubtedly intended to yield all important 'growth', or whatever it is that you try to argue. In any case, I disagree. The society I would like to live in is not the one proposed by you, I am fairly certain of that.

by someone (s0me1smail(a)gmail(d)com) on Tue Feb 13th, 2007 at 05:49:58 AM EST
Your last paragraph was going to be my post.. so I stress it here ..what is this nonsense of dynamics...

This is some kind of guru economists babble bubble fuzzy psuedo-words which have no clear definition, narrative or structure behind... just what the economists want it to  mean..

In this case ,.. since "I" do not like personal solidiraty (and that the rich can not get muh more richer and shove it to the poor much more) let's gonna say that I invent something call Heriuspinus(or dynamism) which we all know is much mroe better and relevant than solidarity and that obviously Europe does not have. the fact that Europe doe snot ahve Heriuspinus can be clearly seen in  the Jiliquanadric Ratio computed in the department of hard-core-deep-down-we-make-it-up  of the Pseudo-Heritage Foundation last year.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Feb 13th, 2007 at 11:48:07 AM EST
[ Parent ]
But isn't this the way op-eds are and newspaper articles? Even the good articles are someone's say-so. Jerome's op-ed in the FT about market liberalisation and the price of gas had no references, no footnotes, no charts. It was all his say-so. We know he got misquoted or misinterpreted several times, by misunderstanding if not by malice.

When someone has a Nobel Prize in Economics, isn't it reasonable to expect that they would get their economic history and basic economic facts right when writing an op-ed? There is something seriously wrong when one cannot trust a world authority on an academic discipline to write a popular piece in a newspaper of record.

We don't pay attention to what the WSJ publishes because we think it's right, anyway. We mostly don't. We pay attention to it because it is a respected (not respectable) source and has immense influence on the discourse public. Maybe it's time we stopped, unless we're just interested in using the press for excuses to write nice articles about, say, economic history.

</rant>

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Feb 13th, 2007 at 12:04:58 PM EST
[ Parent ]
I would be more than happy if they had the ability to convey what they mean when they use these special terms. They do not and they do not pretend.

And fully agree with the rant.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Feb 13th, 2007 at 12:33:02 PM EST
[ Parent ]
When someone has a Nobel Prize in Economics, isn't it reasonable to expect that they would get their economic history and basic economic facts right when writing an op-ed?

Isn't it obvious by now that the only possible answer to that question is 'no'?

The kinds of economists who write op-eds for the WSJ don't deal in facts. They peddle narratives.

In fact they only peddle one narrative, which appears as endless variations on the theme of 'eat the poor.'

Maybe once upon a time this wasn't true. But that's the way it works today.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 13th, 2007 at 07:46:12 PM EST
[ Parent ]
Thank you for reducing economics ad absurdum by taking my comment to its logical consequence.

Now, what is to be done about economics and economists?

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 04:15:26 AM EST
[ Parent ]
The US GDPees farther than Europe.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Feb 13th, 2007 at 12:37:48 PM EST
[ Parent ]
That's because they measure it in feet, and we in metres. It's called Hedonic GDPeeing.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Feb 13th, 2007 at 12:38:38 PM EST
[ Parent ]
I don't agree with everything the Phelps says but I do see a lack of entrepreneurship and innovation in Germany. I wrote about the case of SAP on my own blog.

In general, there is not a start-up culture in Germany. Those few entrepreneurs with a good idea often have to relocate to the US to find talent, or else seek venture capital in the US.

Dialog International

by DowneastDem (david.vickrey (at) post.harvard.edu) on Tue Feb 13th, 2007 at 10:56:32 AM EST
There's a few issues there:

  1. There is next to no venture capital in Europe. That's something a lot of people have run up against. This needs investigating and blaming it on "socialist worker regulation" shouldn't cut the mustard in doing so.

  2. As for "finding talent," I'm pretty cynical about the way people look at this issue. There's lots of talent in Germany, as I know from working in IT there (looking at open source can help us notice this) but:

a) Talent is not concentrated as conveniently as in Silicon Valley. But that's true everywhere in the world. To pretend that this is more about "stultifying culture" than the fact that the centre of the world industry for IT has been SV for quite a while now is pushing it a bit.

b) Not only is venture capital in short supply, but the market is not the size of the US. If you have a startup model that requires X number of customers, it's a lot better to be selling in the US than in Germany.

c) Most of the romantic notions of "easy innovation" come out of very specific conditions, usually involving massive waste of resources that the private US universities and big companies like HP can subsidise. Replicating this in Europe is the real first step, but no-one seems to realise it.

(The examples cited on the blog seem a bit skewed. Karim was never a German, he grew up in the US.)

I won't say there is no cultural effect, but it's mostly about money, venture capital, not about "entrepreneurial culture." Look for the hard issues first...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Feb 13th, 2007 at 02:30:52 PM EST
[ Parent ]
The lack of support for innovation and start-ups is the one place where I could possibly bring myself to think about agreeing with Phelps.

He's wrong to ascribe it to some kind of mythical state of PeaceFreedumanDumbocracy which the US has a monopoly on and the EU is still grasping at.

But it's still a real problem, and it's something the EU could do a lot about.

The other problem is that like all empires, the US is a vast sink of both resources and talent. When it trains smart people from abroad - something it seems to be doing more and more of, rather than training smart people from home - some of those smart people stay and make smart contributions.

Compare that with (e.g.) the UK which is desperate for foreign students, but doesn't really know what to do with them when they get here, and you can see yet another reason why the US has a better overall record for innovation.

It's a common lament in the UK that it's impossible to get interesting businesses started here. While that's not entirely true, it's certainly much harder than it is in the US.

It's going to be interesting to see how China and India fare with their huge investment in engineers and scientists, and their attempts to create an entrepreneurial culture.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 13th, 2007 at 07:56:18 PM EST
[ Parent ]
It's going to be interesting to see how China and India fare with their huge investment in engineers and scientists, and their attempts to create an entrepreneurial culture.

With respect to China at least, there is no need to create an entrepreneurial culture.  It's there already.

It's a common lament in the UK that it's impossible to get interesting businesses started here. While that's not entirely true, it's certainly much harder than it is in the US.

I would love to read a diary about that.

Truth unfolds in time through a communal process.

by marco on Tue Feb 13th, 2007 at 10:29:11 PM EST
[ Parent ]
I second that, I'd be very interested to here TBG's take on this issue.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Feb 14th, 2007 at 03:51:34 AM EST
[ Parent ]
I think the lack of an entrepreneurial culture is an important cultural factor throughout Europe. But you don't foster an entrepreneurial culture by turning the economy into a jungle.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 04:09:38 AM EST
[ Parent ]
Well, I'd argue it's not about "the law of the jungle" as much as the difference between innovation you can see between desert tribes and tribes in areas with more naturally occuring wood, food and useful rocks.

I can quite concede that you need some "law of the jungle" to regulate your system of venture capital. I might not like it, I might not fully believe it, but I can concede it as a working hypothesis.

Let me tell another anecdote:

Lastminute.com is a British (and lately European) internet bubble success story. The founders are two children of privilege, who were able to get extra investment backing from their families at a crucial moment to get over some of the worst cash crunches in the early going.

Nothing wrong with that, but it's rather symbolic of the issue. People fund two things: ideas they understand, or people they know.

There are a lot of entrepreneurs in the US funded by people they know. That's not really that unusual. It's also the basis of the Chinese model over centuries.

What intrigues people about Silicon Valley, is the idea that you can actually get ideas, rather than just people funded. After all, if you only fund people you know, you restrict innovation to the moneyed class.

Question is, if we step away from areas where the US has a natural lead due to historical circumstances, (e.g. IT in Silicon Valley) do we actually see higher levels of innovation? Not to mention higher levels of innovation by small companies, rather than large ones?

by Metatone (metatone [a|t] gmail (dot) com) on Wed Feb 14th, 2007 at 04:30:41 AM EST
[ Parent ]
Lastminute.com is a British (and lately European) internet bubble success story. The founders are two children of privilege, who were able to get extra investment backing from their families at a crucial moment to get over some of the worst cash crunches in the early going.

As I mentioned in a parallel comment, despite the narratives about entrepreneurship and innovation, in the end you are who you know.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 04:35:18 AM EST
[ Parent ]
What I mean about the "law of the jungle" is that I can see two says to encourage entrepreneurship: to remove the social safety net (negative incentive) or to improve financing opportunities (positive incentive). What the neoliberals want is to convince us that we need to threaten people with destitution in order to shake them out of their complacency. I tend to think that microcredit should not only be for the developing countries: it is an absolute shame that is is easier to get an unsecured loan for consumption than for a start-up.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 04:38:40 AM EST
[ Parent ]
I tend to think that microcredit should not only be for the developing countries: it is an absolute shame that is is easier to get an unsecured loan for consumption than for a start-up.

Those are two awesome points.

(Actually, it seems that microcredit financing already exists in the United States, e.g. Grameen and ACCION.)

Truth unfolds in time through a communal process.

by marco on Wed Feb 14th, 2007 at 04:59:14 AM EST
[ Parent ]
There is a wide network of microcredit structures in Europe. Her are some examples:

ADIE

France Initiative Réseau

Banca Etica

and the site of the European Microfinance Network

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Wed Feb 14th, 2007 at 06:19:12 PM EST
[ Parent ]
My own experience is nothing more than anecdotal, but right this minute, I had the idea for a slightly (not massively) different kind of social networking site. Between me and one or two people I know I have access to the necessary skills, but it is a lot, lot harder to get investment capital in the UK.

My idea probably wasn't that good. But this is pretty much the key point. I could maybe have got it funded in the US (but as a practicality at that moment I couldn't do the logistics of that) and indeed, someone did eventually get funding for a very similar idea.

And who were they? Well, some smart guys, one who was an ex-employee of Amazon and that leads us to the fact that the entire startup was largely funded through his contacts at Amazon.

What's the point of this anecdote? I'm not sure, but I think there's something complex going on about existing industry feeding new and related innovations.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Feb 14th, 2007 at 04:13:59 AM EST
[ Parent ]
Also, that despite the narrative about equality of opportunity and entrepreneurship, at the end of the day you are who you know. I almost prefer the cultures where patronage/clientelism is overt.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 04:18:27 AM EST
[ Parent ]
The original blog post (Dialog) talks about SAP. I can't deny that HQ in Germany of SAP is a stultifying place, but that's because SAP was not a software firm originally, rather it was a "manufacturing process services" firm. By accident it turns out that this software has applications in lots of other environments. But, if you compare with similar software firms in other industries (for example "Telecommunications process services" firms) then you find they are pretty stuck with their original culture too.

To escape it, they too build "innovation centres" far away from HQ near top universities and where there are lots of other people with applicable skills to hire. Silicon Valley is a natural site on all these grounds.

However, I should note some of my frustration is simply that Germans run themselves down a lot when it comes to "independence and innovation." There is massive potential in Germany, but it's held back as much by the worship of the US as "the land of freedom and dynamism" as any other cultural factors.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Feb 14th, 2007 at 04:18:29 AM EST
[ Parent ]
My experience growing up in Spain is that there is not only a lot of self-deprecation, but that the educational system will chop your head off if you stick it up above, and that society at large encourages conformity. In the US educational system there is a near obsession with validating people and praising every little "accomplishment". It's likely to be a feedback loop rather than a cause and effect, but I see a stronglink between these cultural factors and entrepreneurship. Then there's the issue of access to capital. Debt still carries a stigma in Spain, IMHO with very good reason and increasingly so after the demise of security of employment. Add to that that creditors are rather conservative, and it has to be really hard to start a business without "a little help from your friends", if you have them.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 04:25:01 AM EST
[ Parent ]
After reading the article, there is nothing there but a pile of unsubstantiated assertions and Appeal to Vox Populi -  "many believe, most think, some believe."  A study which Dr. Phelp conducted and refers to in the article is not cited.  One German economist is quoted, "remarked to me [Phelps]", so we cannot determine if the quote is accurate.  I suppose the reader is supposed to swoon at the analysis of "economist Hans-Werner Sinn" but ... really... who is this person and why should I care?

I'm sure this is the kind of intellectual argument the readers of the WSJ have come to expect.  To someone who has an interest in logic, Critical Thinking, and substantive debate the article is jejune.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Feb 13th, 2007 at 11:26:23 AM EST
What reader of what newspaper expects any level of intellectual argument with citations, proper quotation, logic...?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Feb 13th, 2007 at 12:06:25 PM EST
[ Parent ]
Are you calling me an intellectual snob?  ;-)

I don't give a flying fart what 'The Market' expects from their Infotainment.  Phelps' article was chock-a-block with vacuous inanities and childish errors of reasoning.

It is possible to write an intellectually respectable short essay, on a set subject, without lapsing into InfoBabble.  I conceed such an article is unlikely to appear in the 'Opinion Section' of the WSJ.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Feb 13th, 2007 at 01:57:22 PM EST
[ Parent ]
I'm saying newspapers as a serious format are nearly dead. Online publications, just by being hyperlinked, allow the best of both worlds: ease of reading (as in nespaper articles) and notes and references (no need for footnotes, and linking f entire documents).

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Feb 13th, 2007 at 08:23:37 PM EST
[ Parent ]
Very interesting post. I will bookmark this for further reference.

One point on Europe post 1950. There was still in a number of countries - France springs to mind - a considerable rural population engaged in small-scale agriculture. Part of the story in France is the shift over several decades to non-agricultural employment. It could be argued that in economic development terms this substituted for 'Labour Market Flexibility' between industial or service industry employers.

 During this period I believe growth in French labour productivity was superior to US productivity growth.
Since the mid-1990s the pool of willing rural migrants has largely dried up.

Genuine question: Is it a coincidence that French economic performance figures since  the mid-1990s appear to be less impressive than for the preceeding 30 years?

My background for believing that the rural migration effect has some plausibility:

From the late 1960s to the early 1970s I spent weeks every summer in the same small Commune in southern Burgundy. When I first went there, there were dozens of very small farms ploughing with horse-drawn single blade ploughs. At the end of this period there were only a few largish working farms, using tractors. Most young people had left for jobs in cities (but a number were weekend rural residents returning from flats in towns to cultivate vegetable patches and so on in the corners of remining family homesteads).

by saugatojas on Tue Feb 13th, 2007 at 03:26:58 PM EST
That may be true, although rapid new entry into the labor force does often tends to pull down labor productivity rather than boost it.

For example, the Faini paper that I linked to suggests that some of the recent slow-down in the rate of European productivity growth is due to these kind of effects:

New entrants into employment [after the mid-1990s] were mostly young and quite inexperienced. The recorded fall in TFP growth may therefore be a statistical artifact, to the extent that no (or inadequate) allowance is made for experience. Over time, as the new entrants acquire more experience, Europe's productivity growth would rebound, softening the trade off between productivity and employment growth. . . .

So there has been more rapid job growth but slower productivity growth.

For France between 1945 and 1975 though, you are right, a massive transfer of labor out of agriculture coincided with very high rates of productivity growth.

by TGeraghty on Wed Feb 14th, 2007 at 12:38:28 AM EST
[ Parent ]
I believe you give the correct time frame for migration from the French countryside to the cities: 1945-1975. Small farms continued disappearing after the mid-seventies, but the movement was no longer massive.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 14th, 2007 at 02:00:07 AM EST
[ Parent ]
Well, I'll humbly seize the opportunity of sitting at the feet of a Nobel Laureate. I don't know about you, but I'm here to learn.

Culture matters, Phelps says, and begad that's right. Take the Enlightenment. It seems it began in Europe, since it was Europe's philosophical roots. (Sounds right: Aufklärung, Lumières, anyone?) But Europe went astray and abandoned the Enlightenment somewhere. Fortunately it crossed the Atlantic and was wondrously preserved in the New World. (Possibly it also crossed the Channel - it's the Continent that gets everything wrong, so maybe a bit of the Enlightenment was preserved on the shores of Albion too. Indeed, sitting at Phelps' feet, I get the distinct impression that's what he thinks). Those Continentals now need to get back to the Enlightenment because they have lost their way.

The Enlightenment is about individuals and freedom and it leads in a direct line to American corporations and Ayn Rand. Those who thought there was something in the Enlightenment about social relations and the social contract are not talking about the same Enlightenment. The only part of Liberté, Egalité, Fraternité that came out of the Enlightenment was the first word. The intellectual current elevating community and society over individual engagement and personal growth couldn't possibly have grown out of the Enlightenment, since the Enlightenment is all about... individual engagement and personal growth. It just grew straight into C19 liberalism, free trade, American corporations, and Ayn Rand.

We should feel thankful to America (and Little America, just a bit), for having saved the one true spirit of the Enlightenment. Perhaps too for having successfully preserved the spirit of religious obscurantism. Which allows us to understand this fable of those who have strayed from the strait and narrow path, and need to get back to the truth and, er, see the light. Let's get back to productivity, prosperity and personal growth. That way we'll be right with the Protestant work ethic, isn't that so, Mr Phelps?

Kick. Ouch. No more sitting at feet for me.

(Great article, TG, thanks!)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Feb 13th, 2007 at 04:16:13 PM EST
The Enlightenment thinkers proved, with intellectual skill, flair, and beyond doubt that the highest and noblest action one can take - both for oneself and the community at large - is using one's surplus capital to invest in growth industries.

What else is life for, damnitall?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Feb 14th, 2007 at 01:08:30 AM EST
[ Parent ]
I raise my head briefly from the challenging and personally enriching task of praying over -- uh, counting -- my surplus capital and reaching a decision about which growth industry the Enlightenment wants me to invest in today.

Got anything on the bullshit industry, anyone?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 14th, 2007 at 01:47:44 AM EST
[ Parent ]
That's truly a good way of depicting the problem: As narrative, Enlightenment is now hijacked by the neolibs as means to an end of full market liberalisation. Who of the social democrats (except for France) refer to all of the values of Enlightenment?

The only part of Liberté, Egalité, Fraternité that came out of the Enlightenment was the first word.

Brilliantly put.

by Nomad on Wed Feb 14th, 2007 at 01:38:51 AM EST
[ Parent ]
I was in fact, as I now see in re-reading Are Neoliberals Eurosceptic?, that I was (unconsciously) echoing DoDo:

Liberalism is a great family of political ideologies all built upon the first of the three Enlightement ideas " Liberté, Egalité, Fraternité ", freedom.

Credit where credit's due.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 14th, 2007 at 02:18:20 AM EST
[ Parent ]
The old Liberalism was basically the use of liberty to defend private property.

Neoliberalism is the subversion of liberty to defend private property.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 03:03:16 AM EST
[ Parent ]
We're forgetting two of the key values of the enlightenment: reason and progress.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 03:07:11 AM EST
[ Parent ]
Great post. It's great when you see this nonsense disembowled once and for all.

But have you noticed that htere's a lot of this going around at the moment. When the anglo-american model was abundantly powerful, europe was beneath their attention.

Now the advantage is verging into negative numbers, suddenly there's a slew of articles telling europe how it can't possibly compete.

As some bard nearly said "America, methinks you doth protest too much"

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Feb 13th, 2007 at 05:37:30 PM EST
Access to Natural Resources. On the eve of World War I the US was the world's top producer of an extraordinarily broad range of economically useful raw materials, from natural gas (95% of global production) to petroleum (65%) to coal (39%) and iron ore (36%). This abundance was not simply the result of divine providence, but also of innovation in extraction technology and transport investments that linked resource producing areas with industrial centers, themselves driven by the large potential profits made possible by the large integrated national market.

i would add that many of europe's forests were cut down, the rivers were polluted and the sanitation challenges of retrofitting centennial buildings in towns built around horse-and-cart traffic was breathtaking...literally!

and asia was pretty chaotic too.

in contrast to this, americans inherited an near-virgin ecology that had been husbanded for millennia by masters, which they promptly commenced to pave over, clearcut, stripmine, mountaintop-remove and otherwise despoil in ways thankfully hitherto unavailable.

like the chinese are doing now, sigh...

a 'new world' it was, in title and fact, while europe (and much of the planet) staggered, broken in the bloody mire of its plagued, feudal, inquisitional, racist and bloodsoaked history.

great diary, thanks, your writing is solid gold.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Feb 13th, 2007 at 08:29:01 PM EST
The "American" model is finished, over, dead, defunct, expired - it is an ex-model: its head is off but it's still walking. I give it two to five years maximum before it falls over.

This system based upon debt and absolute property rights over "Commons" HAS to grow, but the reources are not there for it TO grow - the liquid fuel supply is simply not available for the BRIC countries to grow much further, never mind  approach US levels of liquid fuel consumption.

We need a new alternative, and I believe that this is even now emerging. It's time for a new Enlightenment which adds Egalite and Fraternite to Liberte.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 14th, 2007 at 04:32:14 AM EST
from the WSJ Op-Ed pages:


Freedom and Labor

The euro zone just got its best jobless report ever. The bad news: In a decade when record numbers of people found work in the rich world, Europe's best is an unemployment rate of 7.5%, significantly higher than the U.S. (at 4.6%) or any other developed economy.

The Old World offers a useful model of what not to do. Its largest economies -- Germany, France and Italy -- have shunned a policy mix that enabled English-speaking and Nordic countries to reduce the jobless rolls. In its annual "Going for Growth" report released yesterday, the OECD argues that deregulated labor and other markets are the best route to full employment. (...)

We've argued for a century or so that free markets make everyone better off. The OECD report points out the often-overlooked benefits of deregulation to job creation. Freer competition in product and service markets reduces prices. That in turn relaxes wage demands and lets companies hire more workers.

(...)

New governments in Italy and Germany and a soon-to-be new president in France have a chance to catch up with other developed economies on getting their citizens into jobs. The recipe isn't complicated: Lower taxes to reduce wage costs, tighten rules government benefits, loosen up employment protection laws, for starters. Let's hope the pols get to work.

There it is, in black & white:

  • lower taxes on companies
  • reduced wage costs
  • harder to get benefits
  • lower employment protection

should we ever need to point out a quote.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 14th, 2007 at 09:43:31 AM EST
Odd that they bundle together UK and Nordic countries. Have the Nordic countries "reformed" by their rules when no one was looking?
by Torres on Wed Feb 14th, 2007 at 11:43:03 AM EST
[ Parent ]
The nordic countries have lower unemployment than France, so let's just claim that it's because they have the same model as the UK, call it "Anglo-Nordic", and hope that the reader doesn't realise that the only thing the Anglo and Nordic models have in common is the outcome of low unemployment, and very few structural features.

Is that what they teach people in Economics schools? Bleccchh

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Wed Feb 14th, 2007 at 11:56:27 AM EST
[ Parent ]
Is this what they teach people in science? No understanding of basic logic?

P1: There is only one true way - the way of the Free Market, together with its theme tune Willful misinterpretation and misapplication of economic theory Uber Alles.

P2: The way of the Free Market leads to low unemployment.

P3: The Nordic model has low unemployment.

Taken together, we get our conclusion:

The Nordic model  follows Free Market principles since it has low unemployment.

It's not just a claim, it's logic. Science. You know?

by Colman (colman at eurotrib.com) on Wed Feb 14th, 2007 at 12:02:21 PM EST
[ Parent ]
As the proprietor of ProgressiveHistorians, a community site dedicated to the intersection of history and politics, I would be honored if you would cross-post this excellent diary there.

The Crolian Progressive: as great an adventure as ever I heard of...
by Nonpartisan on Wed Feb 14th, 2007 at 09:32:29 PM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]