Events

Introductory Remarks: Perspectives on the Performance of the Continent’s Economies

Edmund S. Phelps, Director, Center on Capitalism and Society, Columbia University.

I greet you on behalf of the Center on Capitalism and Society. In a moment

Hans-Werner Sinn will welcome you on behalf of CESifo.

I want to take a couple of minutes to set out very simply what I believe

the economic difficulty experienced in western continental Europe – its

economic under-performance.

In the past ten years, hourly productivity in the U.S. was growing

considerably faster than it had in the two previous decades and then sped up

early in the present decade. In the same period, deep slowdowns in hourly

productivity began in the Netherlands, next Germany, then Spain and finally

Italy and France. Now, relative productivity in some of these countries is

pulling out of its nose dive, but a cumulative gap has opened up – at least if

purchasing-power-parity exchange rates are used. The corresponding gap

between total hourly compensation, including social charges and other taxes,

has likewise widened.

In addition, unemployment rates are again noticeably higher than those

in the U.S., although not as high as in the first half of the 1990s.

Finally, reported job satisfaction tends to run lower in the Continent’s

Big 3 than in Canada, the U.S. and the U.K.

Most thoughtful observers regard these data as signs of underperformance

and large enough to be a serious problem. There is reportedly a

large out-migration of young people from France to Ireland, Britain and the

U.S.

We have come here to present our differing views on the causes of the

under-performance in continental Europe. Is the main cause some deficiency

in their economic system? Or some by-product of their welfare systems of

social insurance and assistance? Or adverse market prospects in the

Continental economies, such as the Continent’s challenging demographics?

A great many economists observe that the Continent has few industrial

or commercial sectors, if any, that are as innovative as those in the U.S. or

Canada or, for that matter, South Korea or Ireland. In my terminology, the

Continent has been lacking in dynamism, by which I mean innovativeness that

is commercially successful. What, though, are the roots of this deficiency of

dynamism?

In the perspective of neoclassical theorists, the notion of a faulty

“economic system” is an alien concept. Some neoclassicals do not see the

social system as faulty either. They suppose that nationals on the Continent

have their reasons for their large social insurance and social assistance

entitlements. They suggest that homo Continentus has an outsize need for

“security,” which the welfare state is well designed to provide, thus a low

tolerance for risk and change. The result is that few producers and investors

are willing to engage in high-risk projects, even if they have known risk

characteristics, and few consumers are willing to try new products, even if

they too are free of genuine uncertainty. Thus innovation is shunned on the

Continent.

Some other neoclassicals suppose that nationals on the Continent have

the same tastes and risk preferences as do those in the comparator countries.

Yet the political system has given them a larger welfare state than they would

have liked, thus a higher rate of tax and, therefore – or so it is supposed – a

lower level of labor-force participation and employment.

In the perspective of what may be called modern theory, the task is to

find the faults in the economic system – the under-developed economic

institutions or the malformations in the economic culture – that impede or

obstruct entrepreneurs from developing innovations or from succeeding with

them, once developed.

A few decades ago, one might have thought that the productivity lead in

the world would alternate between the Continent and the United States in view

of the comparable technological sophistication of the two regions. But

evidently productivity – not to mention the satisfactions of career and the

workplace – is not simply “technology.”

I have become particularly interested in the idea of economic culture. Of

course, any program to explain inter-country differences by appeal to

differences in cultural traits and attitudes would be incomprehensible from the

stand-point of neoclassical theory. It follows that a rationale for cultural

effects, if found, must go outside the neoclassical paradigm to recognize the

Hayekian entrepreneur, managers with strategic vision, firms with employee

engagement, works seeking learning and personal growth, team players,

consumers with curiosity and Bhidesque venturesomeness – thus Knightian

uncertainty and creativity as well as imperfect information. In an economy

where entrepreneurial activity is important, the culture of the people available

for work is analogous also to their “know-how”: just as a stage and a hall will

not “work” if the assembled players have not acquired the ability to act and

interact, so the plant and hardware of an entrepreneurial company will not

“work” if the personnel is unwilling or unhappy to be organized and to

organize themselves as a team.)

A distinctive feature of this conference is that it will seek to discover

effects of several cultural values, attitudes, etc. on some of the main

dimensions of economic performance.