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:
- A Large, Unified Domestic Market
- Access to Cheap Natural Resources
- 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.
