Edmund Phelps, the 2006 Nobel Laureate in economics, wrote a fascinating piece on OpinionJournal.com Monday, in which he discussed reasons for the disparate economic performance of certain Continental European nations vs. the United States. As I read this, two questions kept running through my mind – what might this mean for a company’s European expansion plans, and is my own company more like the Continent or the US?
Phelps posits that the relative economic underperformance of the big three Continentals (France, Germany, and Italy) stem from their different economic model. In Phelps’s words:
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 other part of the economic model consists of various elements of the country’s economic culture. Some cultural attributes in a country may have direct effects on performance–on top of their indirect effects through the institutions they foster. Values and attitudes are analogous to institutions–some impede, others enable. They are as much a part of the “economy,” and possibly as important for how well it functions, as the institutions are. Clearly, any study of the sources of poor performance on the Continent that omits that part of the system can yield results only of unknown reliability.
Phelps also explores attitudes and values of people in the Continentals toward work, decisionmaking, and responsibility, and finds them quite different from those in the US and Canada.
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.
Much of this seems to come down to a country’s ability and willingness to innovate and implement that innovation. We’re so fond of complaining here in the US about all of our jobs being outsourced and wondering what can be left as our comparative advantage, when the answer is staring us in the face – us! We, and our society, and our attitudes are our advantage. Policymakers had better understand this and start working to get government out of the way of innovation and entrepreneurialism. Notice, I didn’t say government should spur innovation and entrepreneurialism; government should get out of the way. The more we try to close down our economy’s freedom to innovate, whether by imposing restrictive regulation or cutting off the flow of immigrants, the more we squander our competitive advantage. The same holds true for companies. Companies with stifling cultures of controls and risk avoidance mechanisms kill the advantage they have over foreign competition. Whether in societies or economies or companies, rewards come to those with more (responsible) freedom, not less.