Why European economies lag behind the US (& UK, Can. & Ire.)

Discussion in 'Economics' started by Virgil, Feb 12, 2007.

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  1. Excerpts from a Wall Street Journal Opinion piece by Nobel Laureate Edmund Phelps. An good read for anyone interested in the topic of comparative economics.

    CONTINENTAL DRIFT (full article)

    Entrepreneurial Culture
    Why European economies lag behind the U.S.

    Monday, February 12, 2007 12:01 a.m.

    The nations of Continental Western Europe, in the reforms they make to try to raise their economic performance, may prove to be a testing ground for the view that culture matters for a society's economic results.

    As is increasingly admitted, the economic performance in nearly every Continental country is generally poor compared to the U.S. and a few other countries that share the U.S.'s characteristics. Productivity in the Continental Big Three--Germany, France and Italy--stopped gaining ground on the U.S. in the early 1990s, then lost ground as a result of recent slowdowns and the U.S. speed-up. Unemployment rates are generally far higher than those in the U.S., U.K., Canada and Ireland. And labor force participation rates have been lower for decades. Relatedly, the employee engagement and job satisfaction reported in surveys are mostly lower, too.

    It is reasonable to infer that the economic systems on the Continent are not well structured for high performance. In my view, the Continental economies began to be underperformers in the interwar period, and have remained so--with corrective steps here and further missteps there--from the postwar decades onward. There was no sense of a structural deficiency during the "glorious years" from the mid-'50s through the '70s when the low-hanging fruit of unexploited technologies overseas and Europeans' drive to regain the wealth they had lost in the war powered rapid growth and high employment. Today, there is the sense that a problem exists.

    What could be the origins of such underperformance? It may be that the relatively poor job satisfaction and employee engagement on the Continent are a proximate cause--though not the underlying cause --of the poorer participation and unemployment rates. And high unemployment could lead to a mismatch of worker to job, causing job dissatisfaction and employee disengagement. The task is to find the underlying cause, or causes, of the entire syndrome of poorer employment, productivity, employee engagement and job satisfaction.

    Many economists attribute the Continent's higher unemployment and lower participation, if not also its lower productivity, to the Continent's social model--in particular, the plethora of social insurance entitlements and the taxes to pay for them. The standard argument is fallacious, though. The consequent reduction of after-tax wage rates is unlikely to be an enduring disincentive to work, for reduced earnings will bring reduced saving; and once private wealth has fallen to its former ratio to after-tax wages, people will be as motivated to work as before.

    An indictment of entitlements has to focus on the huge "social wealth" that the welfare state creates at the stroke of the pen. Yet statistical tests of the effects of welfare spending on employment yield erratic results. In any case, it is hard to see that scaling down entitlements would be transformative for economic performance. (Indeed, some economists see increased wealth, social plus private, as raising the population's willingness to weather market shocks and helping entrepreneurs to finance innovation. I am skeptical.)

    In my thesis, the Continental economies' root problem is a dearth of economic dynamism--loosely, the rate of commercially successful innovation. A country's dynamism, being slow to change, is not measured by the growth rate over any short- or medium-length span. The level of dynamism is a matter of how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.


    There are two dimensions to a country's economic model. One part consists of its economic institutions. These institutions on the Continent do not look to be good for dynamism. They typically exhibit a Balkanized/segmented financial sector favoring insiders, myriad impediments and penalties placed before outsider entrepreneurs, a consumer sector not venturesome about new products or short of the needed education, union voting (not just advice) in management decisions, and state interventionism. Some studies of mine on what attributes determine which of the advanced economies are the least vibrant--or the least responsive to the stimulus of a technological revolution--pointed to the strength in the less vibrant economies of inhibiting institutions such as employment protection legislation and red tape, and to the weakness of enabling institutions, such as a well-functioning stock market and ample liberal-arts education.


    The values that might impact dynamism are of special interest here. Relatively few in the Big Three report that they want jobs offering opportunities for achievement (42% in France and 54% in Italy, versus an average of 73% in Canada and the U.S.); chances for initiative in the job (38% in France and 47% in Italy, as against an average of 53% in Canada and the U.S.), and even interesting work (59% in France and Italy, versus an average of 71.5% in Canada and the U.K). Relatively few are keen on taking responsibility, or freedom (57% in Germany and 58% in France as against 61% in the U.S. and 65% in Canada), and relatively few are happy about taking orders (Italy 1.03, of a possible 3.0, and Germany 1.13, as against 1.34 in Canada and 1.47 in the U.S.).

    Perhaps many would be willing to take it for granted that the spirit of stimulation, problem-solving, mastery and discovery has impacts on a country's dynamism and thus on its economic performance. In countries where that spirit is weak, an entrepreneurial type contemplating a start-up might be scared off by the prospect of having employees with little zest for any of those experiences. And there might be few entrepreneurial types to begin with. As luck would have it, a study of 18 advanced countries I conducted last summer found that inter-country differences in each of the performance indicators are significantly explained by the intercountry differences in the above cultural values. (Nearly all those values have significant influence on most of the indicators.)

    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.


    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.

    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.
  2. Hmmmmm

    Just wait until their lack of social responsibility comes to bite them in the bum. The lower waged baby boomers who couldn't afford to fund their pensions and won't be able to afford their health care post retirement are going to have something to say about the country treating them so shabbily
  3. Firstly, it's a great article if you consider the ultima ratio of human development to be the acquisition of wealth. (Too often the a priori assumption of economists- especially when they delve into policy advocacy.) Secondly, the philosophical roots which put Europe on the map is not liberalism (in the Adam Smith sense), but mercentilism.

    I don't necessarily think that anyone has found the right balance, Continental Europe has considerable issues to deal with, as Phelps points out. But at the same time I don't think that the US model is the panacea. If you were to look at the Human Development Index, you would not see such a vast difference between the US and Europe. What you would see, however, is that 3 of the top five countries are what can safely be termed Social Democratic systems (Norway, Iceland and Sweden) I don't think the perjorative manner in which Phelps alludes to such ideas as society, community and egalitarianism are especially helpful in this regard. Rather, I think they are exceptionally facile. But then, I would expect little else from a WSJ op-ed.

    I think all too often these days, economists tend to forget that the key means of understanding the behaviour of economic man is not how much stuff he can get, but rather the utility he derives from such things.
  4. I think that makes the perfect criticism of economists, at least in the English speaking world. They are concerned over efficiencies not things like the HDI or often even wealth distribution--I mean as in a healthy middle class not handouts. In the US at least, the success of monetarism and old supply-side economics (even when assisted by Keysnian approaches) drove the old Galbraith (society, institutions, etc) types out of the classrooms and much of the public discourse on the economy.
  5. Virgil, then you buy goods then what do you focus on? Quality, price? Yes. Entrepreneurial Culture of a country where the good were produced? Unlikely.

    Few months ago I bought Suzuki car assembled in Japan. I don't care about Entrepreneurial Culture in Japan but my car is inexpensive, reliable, comfortable and roomy.

    Ask yourself a simple question why the Americans mainly prefer Japanese cars? Lexuses, Toyotas, Hondas and so on.

    Btw, what goods American economy is able to produce cheaper or with better quality than in other countries?

    Entrepreneurial Culture is no more than a tool, not a result.
  6. The analysis he is making isn't from the consumer standpoint, it's a theory as to why some economies are more successful than others from the perspective of establishing and creating a company that sells you those good you're buying on the basis of quality and price. In this case the US/UK/Canada/Ireland contrasted with Continental Europe.

    Not a Ford or GM built in Russia???? Shame on you. I would bet money that on Prof. Phelps entrepreneurial culture scale Japan would rank higher than Continental Europe.

    American firms still sell more cars than Japanese carmakers do in the US, but Japanese cars have the reputation for quality. Oddly though they haven't been able to develop everything for the US market. The truck market, very popular in the US, is dominated by the US manufacturers.

    Suzuki I think is one of the few automakers who still produce extensively in Japan. A large percentage of Japanese cars in the US are now produced here. Mazda and Isuzu are partially owned by Ford and GM.

    The US is a huge internal market, almost equal to the EU. I could list things from communications equipment to cars to computers sold domestically that you've not heard of I suppose. Aviation, high-tech electronics, construction equipment, medical devices, etc are large exports. I've lived in DC, NC and now Seattle (home of the evil giant Microsoft). Each area has a large infrastructure of software, pharmaceutical and other high-tech companies that are generating a lot of work (and wealth).

    Prof Phelps would argue it may be the most indicator of the results being successful on long-term national level. His argument not mine, he seems good enough at it to have won a Nobel Prize in economics, although crabtastic's criticisms are important counter-weights.

    A Russian lecturing on Capitalist economics! Now I can die, I've seen everything! :wink:
  7. Virgil, don't die so soon. It is impossible to know everything. For example I fancy you are absolutely unaware about Marxist economical theory. But your obedient servant learned this senseless science in Moscow university.

    I understand the main point of the article. But I'm sure that any theory cost no more than 1 cent without implementation in real life. I haven't found even one example in the article, only bare statistics.

    I'm a matemetician. If I see an example that contradicts to a proposed rule then the rule is at least not universal.

    From point of view of respected prof.Phelps Entrepreneurial Culture in the UK is very good. So why the disaster with British rails happened? No doubt that Entrepreneurial Culture in Enron was on the highest level to. And huge blackout in the Norther American. Did it happen thanks to Entrepreneurial Culture?

    Returning to car industry, one could ask why Ford lost $10 blns in 2006. Again due to Entrepreneurial Culture? Look at British car industry. Thanks to superiour Entrepreneurial Culture I fancy the most numerous British cars are Hondas and Nissans.

    Why USA with its Entrepreneurial Culture - the best in the World each year buy more than sell?

    I believe in one simple thing. Real world is much more complex than any theoretical scheme.

    PS. Btw. Suzuki Aerio/Liana was recognised as the best in USA in subcompact class. Also this car was a long time winner in the 'Star in a reasonably priced car' segment of the BBC's Top Gear TV.
  8. Try this site EconPapers and type in Edmund Phelps in the search function, if you're interested, for more of his works. Perhaps it will answer some of your questions.

    I suspect the answer is the rest of the economic structures in both countries were healthy enough to absorb the losses.

    The car industry is only a part of one sector but it could be the Japanese 'culture' was superior? Maybe not though, after a glut of buying in the '80s in which they overpaid billions for foreign companies and real estate the Japanese economy has grown much slower than anticipated.

    Part of the reason is that it is easier to import into the US--generally--than to export to many countries who have hidden barriers. For decades the Japanese used the US economy as an outlet for overproduction while being allowed to set up barriers to US exports there. The Chinese until last year played a game where they pegged the yuan to the dollar so that it would never appreciate thus keeping their products perpetually cheap.

    Most important though, the US economy is $12.9 trillion (2006 est). Imports are $183 billion and exports $124.8 billion for a $58.2 billion deficit. Not as significant as the media hypes it.

    I agree, but Prof Phelps can't be criticized for trying to shine a light on an important aspect of economic success.
  9. Virgil. Germany is European economic leader. It has centuries old traditions in business. Also I don't think that Norway, Finland, Austia or Switzerland have economical 'culture' visibly worse than in Ireland. What special Ireland has?

    If mr.Phelps would speak only about USA then it would be logical. But mention of Ireland looks strange. It is a typical European country.

    Many thinks that top scientists are almost semi-gods but I'm very sceptical on these matters. Many their 'researches' really are politically motivated.

    Yes, real size of American economy is huge. But of course it is inflated.

    Suppose that a layer and a doctor pay each other for respective services (and it contributes to GDP). In theory they could pay billions of $$.

    Costs of some services in USA are huge, many times bigger than in other countries with the same or even poorer quality. What was a cost of mr.Bush's education (btw, it was a part of GDP)?
  10. Strong article but with an equally strong subtext. His subtext is typically neo-con UK and American, that is, Europe is paying the price for adopting a socialist liberal capitalist model after the wars. Our welfare policies are a cancer at the heart of our economic model. But this was a burden willingly borne as Europe did this with its eyes open. And frankly it was an amazing achievement to have constructed institutions that delivered despite their shaky foundations. Of course Hilary is taking notes now.

    The UK neo-cons (such as Thatcher) were also happy to paint a picture of decline to justify their actions. We in this forum refer to the past 50+ years as decline, well, we have to be really careful here that we don't let US neo-cons write the script. The achievement of post-war Europe is significant, including the UK's.

    The context being the US had a second industrial revolution that picked up the baton from Britain's first.

    Europe was aware of the US's potential in the mid 19th C. and to no surpise the US overtook the UK between 1880 and 1914 in terms of economic lead, largely not just because of its 'entrepreneurial spirit' (as this slightly self congratulatory article implies) but its commitment to:

    a) building large corporations (and its management skills) and b) a single integrated market that generated massive scale economies and c) its natural resources. And latterly d) the size of its venture capitalism

    Britain's entrepreneurial flare flickered and dimmed with the drying up of its natural resources and its lack of re-investment in second generation industrialisation (the flaw of having industrialised first).

    But his thinly disguised main point is Europe is largely a 'social liberal capitalist' model where America remains wedded to its 'classical liberal capitalist' model. Europe's strange mix of social capitalism he's saying has made us soft and limp.

    But he doesn't remind the reader of the US's single integrated market can never be matched by Europe's without political union (slow) whatever our economic ideology and America culturally can never match the cultural diversity of Europe (there are some things money can never buy).

    We have to see our progress in the light of what the EU can become as an economic driver. Its potential is significant and it will always suit the neo-cons to hurt its image. If the UK had embraced Europe firmly in the 50s we would have enjoyed the economic miracle the Germans enjoyed.

    Edited to add: That the US is a deeply flawed culture, with a huge underclass, trapped in relative poverty, which its economic wealth and model is not addressing.
  11. Germany's economy hasn't been growing at the same rate as the US/UK/CDN/Ire group in the last 20 years. It, France and Italy, the largest and most influential continental European economies are his focus. Ireland's specialness is it's explosive growth in the last generation.

    Is it though? It seems very influenced by its proximity to the UK and it's diaspora in the US, as well as a common language.

    Are you saying per capita GDP, worker productivity, capital available for investment, tech advances, and a dozen other measurents (even those from outside the US) that put the US economy in the forefront are misinformed? Deutshe Bank,

    I suppose it would matter if that was the sum total of the economy, but they aren't.

    I think you have a limited view of US economic output in terms of quality and services. The better criticism of the US economy is mentioned by both crabtastic and BSL; quality of life versus efficiencies or economies of scale. Is economic efficiency and productivity worth it when 10-15% of the populace is a perpetual underclass? Is the lack of national medical care worth allocating economic resources to?

    Bush is God's way of encouraging Yale University to be more humble.
  12. The economies of Europe lag behind the US because of socialist policies,over regulation by government and high taxation. Its easy to fix, start by reducing the tax rates and cutting through the red tape to make life easier for business. The US budget deficit has dropped due to lower taxes which has fueled a growth in revenue.


  13. And those of us smart enough to understand the article know that this is the same argument that Phelps makes, you've just found a dumber and more facile way of making it (as only you seem to know how). What the rest of us are saying is that economic growth is my no means the be-all & end-all of human development. For example, some 40 countries have a lower infant mortality rate than the United States. Others faring better include, ohh

    Italy, San Marino, Greece, Monaco, Ireland, UK, Gibraltar, Portugal, Netherlands, Luxembourg, Belgium, Austria, Denmark, Slovenia, Spain, Switzerland, France, Germany, Andorra, Czech Republic, Malta, Norway, Finland, Iceland and Sweden.

    Even Aruba and Cuba do better.

    You see, people can be happy to pay taxes if they think they're getting a decent service. The free market isn't the answer to everything. The US spends twice as much on health care (as a percentage of GDP) as the UK, yet infant mortality is higher and life expectency is lower.

  14. Virgil, there are different estimates, different approaches.


    I'm sure the article would be an interesting reading for you.

  15. The $12.7bn loss by Ford, albeit including restructuring costs, is quite staggering, but more significant since 'Fordism' (the American meaning of that word not the Marxist version!) was the byword for America's 'second-industrial-revolution'. Ford were exemplars of scientific management, management control and market domination.

    But, Ford's products are tired, their observation of market trends were/are out of touch, and they, like McDonalds, are playing 'brand recovery'. This is partly irrelevant since the American economy is so strong in-depth, but if these 'signs' are of the Americanisation of Western society being at its tipping point it's unlikely that Europe will pick up the lead, with China and India poised to use their single markets to heat their economies.

    The first £28 suit is about to hit the UK stores I believe from China. And everybody thought that in developed economies cost leadership wasn't the cornerstone of future strategies. However, China can produce at staggering prices and it seems in a global market we still want to pay the lowest price.