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Saturday, June 11, 2005


This, the 5th article in a series on the economic performance of the two dominant forms or capitalism in the industrial world --- state-capitalisms in Japan and on the EU-15 Continent and market-oriented capitalisms in the English-speaking countries --- is a direct follow-up of the previous article's argument. There are four parts, all logical extensions of that argument. If you haven't read it, you will profit from at least running your eye over its main points.


How the Four Parts of the Argument Unfold:

Don't worry about parts one and two being jumbled together at the outset here. There's a good logical reason, as you'll see in a moment. The key thing is to grasp how the argument unfolds in each part.

Parts 1 and 2. Joseph Schumpeter, a prominent Harvard professor in the 1930s and 1940s, is featured in this article . . . especially his important theoretical analysis of long-term economic growth, which has been elaborated on and refined by his small band of followers in economics since his death in 1950. In part 2, his crackling insights into the nature of capitalism and the causes of long-term economic growth are only sketched in, along with a lengthier analysis of the role of institutions that vary across countries, including the industrial ones that we have been probing in the current series. The role of a country's institutions --- economic, financial, legal, political, and administrative --- in technological innovation, especially of a radical restructuring sort for the entire national economy, is a key Schumpeterian concept, worked out by his followers in the last two decades. That includes how these various institutions interact --- not least, those in the public and private sectors --- and create a economy-wide system of national innovation.

The effectiveness and flexibility of these systems of national innovation, it turns out, vary noticeably across countries, including those in the industrial world. Ponder a moment this last proposition. In particular, how does it translate into the buggy terms that have been used in this current series of articles?

The answer is double-barreled.

First off, unlike Schumpeterians, we've reduced the diverse systems of national innovation to two distinct kinds of capitalism in the advanced industrial world: statist-capitalism that prevails in Japan and on the EU Continent and market-oriented capitalism in the English-speaking countries. That helps us understand the noticeably different economic performance of these two distinctive kinds of capitalism, particularly in an era of vast, fast-moving changes in global capitalism. And secondly, again unlike the Schumpeterians, prof bug --- a political scientist after all --- has used different ideological heritages in the industrial countries to explain why those that are English-speaking have institutions favoring market incentives and adjustments, with a far more limited role for states, and why Japan and the EU Continentals have a much more extensive state-role in economic life.

What follows then for the way the argument is organized in these two parts?

Part 1 will deal directly with the different ideological heritages that have shaped the two divergent systems of capitalism in the industrial world, adding some historical bulk to the earlier buggy analysis in the previous four articles. It will then link them once more to the noticeably different economic performances of the countries in each system, the English-speaking ones far outdoing those adhering to state-capitalism . . . particularly in an era of rapid and unruly change in global capitalism. Those rippling changes are pinned down and clarified in this part. So too are the criteria for successful economic performance in adjusting effectively or no to those changes. And once again some extensive evidence is set out in tabular form.

Part 2 will then do what was just said a couple of moments ago: briefly explain Schumpeter's key insights into long-term economic growth, along with a longer analysis of one of the neo-Schumpeterian inferences worked out in the last two decades: the fact that countries all have different systems of national innovation.

Part 3. In this next part, Schumpeter's unmatched insights into the causes of long-term economic growth are probed in much greater depth, four of which stand out.

(i.) The driving force in economic growth of revolutionary technologies that erupt on the economic landscape in long-term waves every 50-60 years --- and in the process drastically change the ways in which we work, live, and spend our leisure. To say nothing of the implications for altering the global distribution of power.

(ii.) The crucial role in bringing these revolutionary technologies to the market-place of bold, rambunctious entrepreneurs and their devil-may-care impulses to win glory and fortune.

(iii.) The inevitable need for all national economies --- especially rich ones with their high wages --- to let the gales of creative destruction play out freely and shatter the entrenched economic status-quo, itself manned and guarded by huge vested interests whose high-coiled resistance to change has to be overcome. Only in this way, it turns out, will there be enough scarce capital and human talent freed to let the successful entrepreneurial start-up firms grow and flourish and hence diffuse, over time, their innovative technologies and productivity enhancements across one industry after another. Only in this way will older, increasingly obsolete technologies, knowledge, skills, factories and other business firms --- not to forget piled-up inventories --- be destroyed, making way for a newer, updated economy to be created that is more dynamic and globally competitive.

(iv.) The institutionalized abilities of countries to innovate --- which means to provide bold entrepreneurs and overcome the backlashes from old-established firms and industries so that creative destruction can work its impact --- varies noticeably from one to another. They turn out to have different systems of national innovation, some more successful than the others. And in the US case, as we now know --- or so this buggy series has argued --- markedly more successful.

Part 4. With these pivotal concepts clarified and ready for use, the argument shifts in this part to probe the failures of the state-capitalist systems in Japan and the EU-15 to keep up with the innovative pace and dynamism of the English-speaking countries and their market-oriented systems.

It turns out that statist-capitalisms don't and probably can't adapt quickly to the swift, turbulent changes at work in global capitalism, and even less, it appears, can they innovate radically in the technological domain.

The chief reason why? In such systems, the logic of politics trumps the logic of markets, and political calculations and maneuverings dominate market incentives and flexibility, institutionally and in the outlook and behavior of individuals who are in the work force, in coping with the tumult in their wider technological and global environments. The English-speaking countries tend, as a general rule, to reverse the logic here. Markets are allowed to operate with much greater flexibility, and individuals --- risk-taking entrepreneurs, the managers and work forces in big established corporations, unionized and non-unionized workers, and those who run financial institutions --- are more willing to accept and innovate. In any case, to the extent they aren't willing, they can't have such easy recourse to state regulations and subsidies to block the gales of creative destruction.

Addendum, added June 11th, 2005, just before publishing this article on the buggy site: What with the length of the finished article --- a good 45 pages, single-spaced, in Word --- it seems wiser to divide it into two articles. The current version, accordingly, stops at the end of Part 2. Parts 3 and 4 are essentially done, with a need for some more back-up data and other evidence; little else. They will be published in the follow-up article, most likely on Monday or Tuesday, depending on how much time prof bug takes off from writing this weekend.


I. Schumpeterian Concepts and Buggy Analysis

Joseph Schumpeter and His Theoretical Work

As its jump-off point, our argument in the substantive parts will unfold a Schumpeterian approach to long-term economic growth, using the four concepts sketched in above and clarified and elaborated on later in part one.

As for Joseph Schumpeter's life, no need to dwell at length on it here: an Austrian by birth, he fled the growing Fascism and Nazism spreading in Europe in 1932 and ended up a professor at Harvard. It was there, in the 1930s and 1940s, that he developed his most important theoretical work on the causes of sustained economic-growth and the related idea that capitalist economies are inherently dynamic and not subject to the sort of equilibrium analysis that dominates neo-classical mainstream economics, with its penchant for marginal analysis in stable macro-economic conditions. Why no need to elaborate? Quite simply, because prof bug has discussed Schumpeter in an earlier buggy article, complete with some links to Schumpeter's life and work. Click here for that article. Those who want to deal further with Schumpeter --- at any rate, in greater depth than the points that unfold in today's article --- will find all sorts of online sources at this web site.

Of Schumpeterian insights into long-term economic growth, we're especially interested in . . .

in Diverse Systems of National Innovation and How They Handle Entrepreneurship and the
Rugged Gales of Creative Destruction.

All four of the key Schumpeterian insights touched on at the start of this article --- long-term waves of clustered revolutionary technologies, the key role in innovation of the raw energies of risk-taking entrepreneurs, the inevitability of creative destruction if the innovative start-up firms are to prevail, and different systems of national innovation --- are important for the substantive argument today, but the one that needs to be singled out here is the last of them. The chief reason? It's the one that hooks up most closely with the buggy stress on the institutional networks within industrial countries.

What we've done is to add two high-coiled twists to this institutional approach.

  • We've divided the various economies of the rich industrial countries --- 20 in all that span the EU-15, Japan, the US, and Canada, Australia, and New Zealand --- into two distinct systems of advanced capitalism: statist-capitalism that dominates Japan and the EU countries on the Continent, and market-oriented capitalism that flourishes in the English-speaking countries, including the two in the EU: Britain and tiny Ireland. Later on, in part one, we'll clarify once more the reasons for sticking to two such encompassing systems.

  • And the buggy series has sought to pin down and explain the historical causes of these two different systems of organizing capitalism --- especially the key relations between states and markets. Our chief explanatory concept has been different ideological heritages in the English-speaking countries as opposed to Japan and the Continental West European countries.

II. The Ideological and Institutional Contrasts Briefly Summarized Once More

Far Different Histories Produce Far Different Ideological Heritages in The Two
Kinds of Capitalist Countries

If statist-capitalism has prevailed in Japan and on the EU Continent, it's because their long history before and during the 19th and early 20th centuries --- a lengthy era of turbulent industrialization, acute clashes between the forces of democracy and anti-democracy, and rippling nationalist conflicts --- generated, for the most part, far more domestic strife and violence than in the English-speaking countries. In turn, this strife and violence fostered a far different ideological heritage in state-capitalist countries before WWII than in the US, Britain, Canada, Australia, and New Zealand. Almost all these state-capitalist countries --- aside from Holland and the tiny Scandinavian countries --- experienced surges of ideological extremism, militant and violent, in the late 19th and early 20th centuries.

One clear sign of the difference between the ideological heritages in the two groups of countries is that Communism or other forms of revolutionary Socialism hardly got off the ground in Britain, Canada, Australia, New Zealand, or Ireland before WWII, let alone since. Mass followings of either Marxist movement were conspicuously absent in their political histories . . . very much unlike in Japan, Germany, Austria, Spain, Portugal, Italy, France, and even Belgium.

The same is true of right-wing extremism.

Militarized arch-Reaction and even more radical and violent Fascisms never attracted much support in any of the English-speaking countries; period. Oppositely, they came to dominate and rule in all the countries just mentioned, WWII one of the their direct consequences. Only in tiny Scandinavia, Holland, Ireland, and of course Britain did militant fascist appeals in the 1930s and into WWII have no big echo. Not surprisingly, these are all countries with historical traditions of evolutionary monarchy, first into constitutional monarchy and then into moderate liberal democracies. But note. Even in Norway, Belgium, and Holland, as in occupied France, collaborating governments with the Nazi occupiers ruled until their liberation by Anglo-American forces. The same was true of Finland, though at least the Finns --- who fought alongside the Nazis on the Russian Front --- had a clear separate national interest here: the restoration of their territory seized by the Soviets who invaded them in the late fall and winter of 1939.

Switzerland, 6 million people who aren't in the EU, is the other exception on the West European continent to political extremism in its history. But note again. Thanks to the revelations of the last decade, we now know just how inclined its government and elites were in WWII to aid the Nazi war effort, industrially and financially. As for East European countries, even those in the EU, they haven't been a concern in this buggy series, and for an overriding reason: none are advanced industrial countries. Note, though, that in the 1930s and into WWII Poland, Hungary, Russia, and Yugoslavia had militarized arch-reactionary regimes with fascist allies, and later in WWII Hungary and Rumania were joined by Bulgaria, Slovakia, and Croatia (plus lots of Bosnian Muslims) in developing fascist governments and becoming allies of Nazi Germany.

Post-1945: The Growth of An Advanced Regulatory and Welfare-State Form of
Capitalism in Europe and Japan

After WWII, all the state-capitalist countries created a highly intricate regulatory and welfare-state system that drastically expanded the role of their states in their economies and social life. Small wonder. Its creation and expansion have been essential to their social peace. It ended the century-old conflict --- often violent, often ultra-destructive --- between capitalism and socialism and the class strife associated with it, and simultaneously it has banished from their politics the destructive legacy of ideological extremism.

Radical Marxisms of various kinds have died out. In Italy and France, Communist parties after 1945 were the largest single parties; these days, they have markedly shrunk in members and votes. On the right, the new consensual politics has showed up in the decline of militarized Reaction or outright Fascism. There are, it's true, reactionary and racist political parties in West Europe again, like Jean-Marie Le Pen's National Front in France and Joerg Haider's Freedom Party in Austria, to say nothing of smaller ones in Belgium and elsewhere. There's no doubt that they're a source of worry, no doubt too that there's always the danger that age-old demons in European life might surge in the future, given the economic stagnation that's settled in and the growing frictions between Europeans and Muslim immigrant communities. Anti-Semitism has returned to Europe too, and is widespread in numerous countries. For the most part, though, the politics of democratic compromise and moderation still prevail in the EU.

The same is true in Japan. The Communist party has virtually disappeared, and the once revolutionary Marxist Japanese Socialist party has shucked off its radical heritage.

In short, thanks to the highly developed regulatory and welfare-state systems that Japanese and West European government institutionalized after 1945, these extremes faded, and general social peace and political moderation have prevailed in their national lives. The resulting economic system may be far removed from the standard textbook models of market economies, but there are sound reasons why such statist-capitalism has emerged and persisted, and its persistence into the future --- even if modified at the edges --- seems no less essential to their social peace and politics of moderation far into the future.

Whether anyone can be optimistic about the ability of the Japanese or EU Continental countries to reinvigorate their economies --- which means in Schumpeterian terms to let the gales of creative destruction play out and drastically alter the existing status-quo --- is another matter, regarding which the previous buggy article has had some things to say. Come to that, we'll have a fair amount to say in future articles too.

A Different Ideological History, Yet A State-Capitalist Interlude In Many

By contrast, the key point about the ideological heritages of the English-speaking countries can be set out in a few summary words: with a far different history, they have had a far more moderate ideological heritage, and that includes a more market-oriented orientation in all of them during the 19th and very early 20th century. Even so, like the state-capitalist countries, Britain and Ireland were joined by Australia and New Zealand in fostering a large regulatory and welfare-state economy too. It was only in the 1980s, to reverse three decades of slow economic growth and sclerosis, that reform-minded conservative parties carried out a series of far-reaching market-oriented reforms that have noticeably reversed the growth of the welfare-state and deregulated the economy.

What then explains their thirty-year state-capitalist interlude?

The easiest answer: unlike the US, all these countries had a strong Labor Party that was inspired by non-Marxist socialism on the left, and there have always been statist-and paternalist leanings in their conservative parties (called liberal in some places). The Great Depression marked a huge pro-statist trend in these four countries, where unemployment soared and capitalism was discredited. World War II's huge mobilization of the citizenry reinforced the belief that millions of soldiers couldn't and wouldn't return to civilian life and go on the dole again. The outcome was the big breakthroughs of Labor Party rule . . . in Britain for the first time as a majority party in 1945, almost a half century after its creation.

With their paternalist and statist-leanings, conservative or liberal parties that subsequently governed has no trouble accommodating to the growing welfare-state and regulatory systems put in place by left-wing parties. Only economic stagnation --- to put it bluntly --- led to sweeping changes in Britain, Ireland, Australia, and New Zealand, all in a market-oriented manner.

Canada An Exception, The US Too

Focus for the time being on Canada. Where does its economy fit in --- is it a state-capitalist country or a market-oriented one? It's not easy to answer. The country is something of an economic odd-man-out these days.

Historically, until the 1960s, its economy wasn't much different from the US's despite a stronger pro-socialist ideological heritage on the left and a Tory-influenced conservatism on the right. Unlike the US, too --- past and present --- Canada's financial, corporate, and bureaucratic institutions have been dominated by a something of a ruling establishment, mainly English Canadian elites, with co-opted English-speaking French elites working closely with them. A more identifiable political class has always existed in Canada too, now top-heavy with Liberal Party leaders. Even so, down until the early 1960s, Canada's economic institutions and policies didn't differ noticeably from the US's.

This has all changed since then. The Quebec-based Liberal Party --- never once winning a majority vote among the electorate (in fact taking power of both houses of parliament sometime with only 32% of that vote) --- has dominated Canadian life for the last four decades and markedly moved Canada in a Continental EU direction. Government spending soared, as did regulations, taxes, and welfare transfers; and these days, despite a fairly successful effort to bring down governmental spending, its economy looks like a half-way house between the statist-capitalisms and its original market-oriented institutions and policies . . . mainly due to the dominance of the Quebec-based Liberal Party in Canadian politics, unbroken for more than four decades since the early 1960s except for a brief interlude in the 1980s.)

All of which brings us to . . .

IV. US Exceptionalism Again, Even in the English-Speaking World:

Yes, exceptionalism: an apt and accurate tag. In this connection, recall that a running thread throughout the buggy series that started in December 2004 has been to single out the US as having an unique ideological heritage --- on both the left and right.

What Stands Out

That's true even among the English-speaking countries. Contrary to the other countries in that group --- Britain, Ireland, Canada, Australia, and New Zealand --- there's been no socialist tradition in American history, not even of a non-Marxist sort; and simultaneously there isn't a tradition of statist and paternalistic conservatism of the sort found, say, in the Tory wing of the British Conservative Party that has its roots in pre-industrial, pre-democratic British history. All the other English-speaking countries except Canada developed, after WWII, highly developed regulatory and welfare-state systems. Labour parties wanted it; statist conservatives readily acquiesced and later expanded statist-capitalism when they were in power. Only later, in the 1980s after three decades of comparatively sluggish economic performance, did political leaders come to power in Britain, Ireland, Australia, and New Zealand whose governments carried out an array of radical institutional and policy changes. To restore economic vigor, they drastically pruned their countries' welfare-state and regulatory apparatus while instituting pro-business and market-oriented policies. These reforms have been largely successful. They have markedly improved their economic performance, first compared to the earlier three decades, but also compared to their statist-capitalist rivals in Europe and Asia.

By contrast, the US never developed a highly developed regulatory and welfare-state system after 1945. It was alien to our ideological heritage.

None of this means that the US has a laissez-faire economy. It never did, not the way Britain developed one in the 19th century; and starting in the 1880s and into the Progressive era and then the New Deal of the 1930s, various Republican and Democratic administrations did develop a strong anti-monopoly regulatory system, to which it added other regulations of specific industries, along with a system of unemployment insurance and social security. All this occurred before WWII. After 1945, Democratic administrations expanded this modest welfare-state system, and the Nixon administration implemented stringent environmental and health-and-safety legislation in the early 1970s. Since the mid-1970s, market-oriented reforms offset these trends. Specifically, beginning in the latter two years of the Carter presidency, Democratic and Republican administrations have deregulated much of the economy, cut back taxes, and reformed welfare policies while pushing strongly for removing tariff and other obstacles to integrating our economy with global capitalism.

The US Economy and the Rough-and-Tumble Forces of Creative Destruction

Note the period when de-regulation and the other subsequent market-oriented reforms began: the late 1970s.

From a Schumpeterian angle, that period isn't accidental. The mid- to late-1970s marketed the start of the latest long-term wave of revolutionary technologies, centered on information and communications industries as well as biotech. Don't worry: we'll clarify this wave in part two today. For the moment, observe how --- as this new wave of radically restructuring technologies burst upon the existing economic landscape --- the American economy would have to carry out a new round of dislocating creative destruction if our economy's growth rates in productivity and per capita income were to be rejuvenated; and of course that is exactly what we've been doing for the last 30 years or so, starting with the Carter and Reagan administrations. The abrupt jarring changes and dislocations aren't over yet. They continue to unfold their rippling impact in the current decade.

When will the disruptive forces of this round of creative destruction modify and fade? A pivotal question, no? Well, the answer is that . . .

Nobody Knows.

What we do know pretty well is that the worst disruptions and jolting changes have already been absorbed in this country over the last 30 years. The result has been the emergence of an entirely different sort of economy, knowledge-based --- high-pulsating innovations still tumbling into existence, not just in ICT industries but in biotech and increasingly, just on the horizon, the huge potential of nanotechnology. The latter works on materials at the molecular base, and it may turn out to be the most revolutionary technology since humankind discovered fire. Consider something important by extension.

If we are in a knowledge-based economy --- an end to innovation, even of a radical sort, nowhere in sight in ICT, biotech, nanotechnology or possibly even in alternative fuels --- the current 5th wave of radically restructuring technologies may not lose momentum as they have in the previous four waves that began with the industrial revolution in the late 18th century.

To say anything more at this point is to run way ahead of our argument. Before moving on, though, try to keep in mind one tantalizing point, once more set off in a florid blue:

Namely: in a knowledge-based economy, the pace of revolutionary innovations might not flag in vigor as happened to industrial countries in the 19th and 20th centuries. And in that case, countries with the better, more flexible systems of national innovation may never lose their lead.

American Success in Mastering the New Technologies and the Recurring Gales of Creative Destruction

The success of the US in pioneering the latest long-term wave of revolutionary technologies, in the process reinvigorating the entire base of our national economy, is nothing new. Over the last two centuries, this country developed a unique national system of innovation --- just as it has fashioned a unique ideological heritage, the two going hand-in-glove; and not surprisingly, it has spearheading the last three long-term waves of revolutionary technological change. The third wave --- as we'll see in part three of the argument today --- began in the 1880s and 1890s; yet even decades earlier --- at the end of the first wave pioneered by Britain in the 1770s and 1780s and drawing to an end in the 1820s --- the level of American manufacturing productivity, it turns out, was already higher than Britain's, despite the much greater size and influence of agriculture in this country and a higher per capita income in Britain.

Thanks to this unique national system of innovation --- unusual even in the English-speaking world --- the US has been the richest country in per capita income for at least a good hundred years and possibly --- depending on the data-set used by economic historians --- for much longer, going back to the early 1880s. The following table brings up this American superiority clearly. It reflects the success of the American economy in spearheading the last three waves of revolutionary technologies . . . all discussed later in part two today.

Untitled Document
Per Capita Income 1905 - 2004
1905 1950 1990 2005*
USA 4,565 9,561 23,740, 40, 650
W. Europe 3,054 4579 16,872 26, 437
Japan 1,157 1,921 18,789 28, 230
Germany 3,104 3,810 18,596 27, 381
Britain 4492 6, 930 19,817 27, 490
Sources: Angus Maddison http://www.eco.rug.nl/~Maddison/ for the data in the first three columns; Bureau of Economic Analysis; CIA World Factbook; OECD, and The Economist for the year 2004

The huge US lead in 2005, as you can see from the table, is roughly what it was over West Europe in 1905. In theoretical terms, there has been no catch-up convergence on the US as the lead country by any of West Europe over the last century. Japan has converged, it's true, because it was so poor in 1905. Even so, its convergence ended in the 1980s, and since then its per capita income has slipped back noticeably as well.

The following table reinforces these points by focusing on the last half-century. Once again, the failure of other major industrial countries to converge over the long-run on the US lead is strikingly brought out, making allowance once more for Japan's very low level of per capita income in 1955 . . . the starting year in the table.

Untitled Document
1955 1960 1970 1980 1990 2004
USA 100 100 100 100 100 100
Canada 72 73 78 92 95 77
Germany 53 66 73 78 79 67
Japan 21 30 56 66 79 69
France 49 59 71 77 77 68
UK 64 69 66 66 73 68
Italy 37 46 58 67 69 66

A Big Problem for Mainstream Growth Theory

The failure of mainstream economic growth theorists to deal with the failure of convergence theory in regard to the persistent US lead is something strange, no? Hardly any have even noticed it in their work.

That failure, it's clear, is due to the penchant in mainstream economics for slighting the divergent not only the nature of economic and political institutions across the industrial countries, but also political ideological heritages and how they have combined to create two entirely different kinds of capitalist systems: statist-capitalism and market-oriented capitalism. By extension, they've also slighted the unusual nature of American capitalism among the English-speaking countries, particularly the ways in which ideologies and institutions have combined here foster the most creative and flexible of national system of innovation in the world.

Note quickly though:

V. Market-Oriented Capitalism Everywhere Has Registered A
Superior Economic Performance

Yes, clearly superior. It isn't just the US that has had success in mastering the recent wave of revolutionary technologies and coping effectively with the rippling forces of creative destruction . . . including the tumultuous changes unleashed in global capitalism for two or three decades now (clearly set out in a few moments). Since the 1980s, all the market-oriented English-speaking countries have enjoyed far more success than their competitors that adhere to statist-capitalism in Japan and on the EU Continent. For that matter, they've done far better than they had between 1945 and the early 1980s when Britain and Ireland in the EU and Australia and New Zealand all carried out sweeping reforms of their existing regulatory and welfare-state economies.

All of which prompts a logical query:

. . . What Do We Mean By A Superior Economic Performance?

Far and away the most important criteria for measuring the performance of any national economy are two-fold: its rates of growth in GDP and per capita income over a sustained period of time, and its job-creation --- as reflected in current unemployment statistics, especially long-term structural joblessness.

There may be other criteria that are important for some people --- the distribution of income, say; or environmental concerns. That was recognized in the previous buggy article.

What was also recognized there, stressed even, was that ultimately --- if any complex industrial economy falters badly in its ability to generate the growth of per capita income and enough jobs to hold back unemployment --- its performance in other areas will invariably suffer too. The tax base will be strained; social and economic policies will have to be trimmed, often drastically; state-financed pensions for the ever growing numbers of retirees in the industrial world will have to be cut; and national morale will likely suffer . . . quite apart from electoral rebellions, usually to the benefit of demagogic and extremist parties, some preaching violence and racism.

Note that this isn't just buggy speculation.

The most honest and searching study of the EU countries severe economic troubles --- put out by a large team of experts headed by Wim Kok, a former Dutch Prime Minister, and commission by the EU itself --- arrived at a dire prediction on these scores last fall (2004) . . . at any rate in the statement read by Kok himself to the EU media. Without radical institutional and policy changes, he observed,

*A series of "devastating effects" might follow, including institutional "contraction and decline" on the regional and national levels alike. "In sum, Europe has lost ground to both the US and Asia; its societies are under strain; and some ugly forces are beginning to manifest themselves."

*If these trends continue, then "what is at risk ... is nothing less than the sustainability of the society Europe has built and to that extent, the viability of its civilisation".

The Two Baseline Criteria Illustrated:

As the previous articles showed --- and will show again in a moment or two with some data --- it's a hands-down win for the English-speaking countries and their market-oriented capitalisms.

GDP Growth Rates

GDP Growth Rates 1970-1980, 1980-1990, 1990-2003

Untitled Document
1970-80 1980-1990- 1990-2003
Australia 3.3 3.4 3.8
Canada 3.3 3.2 3.3
Ireland 4.7 3.2 7.7
New Zealand 1.6 1.9 3.2
United Kingdom 1.9 3.2 2.7
USA 3.2 3.6 3.3
Japan 4.4 3.9 1.2
Euro-Zone Average 3.3 2.4 2.0
France 3.3 2.4 1.9
Germany 2.7 2.3 1.5
Italy 3.6 2.5 1.6
Sweden 1.9 2.5 2.3

Job Creation and Unemployment Rates

Start with unemployment rates, which are of most concern to average citizens who wonder about their own country's labor market performance compared to others in the industrial world. The following chart, created by the US Bureau of Labor, looks at the unemployment rates of the G-7 countries between 1960 and 2000. The member-countries in the G-7, besides the US, are Japan, Canada, Britain, Italy, , France, and Germany.

The chart groups the four EU countries together, which is something of a shame. As a a market-oriented country since the Thatcher reforms of the 1980s, Britain fits uncomfortably in this group ever since. Still, you get a clear idea of how poorly the grouped EU big four have done since the first oil shock of the early 1970s, which -- to repeat -- marked a clear turning point in the postwar GDP growth rates of West Europe and Japan . . . all converging on the US lead for roughly 30 years until the end of that decade. (Note, except for the unemployment rate for 2005, the following charts and tables are taken from a US Bureau of Labor study by Constance Sorrentino and Joynanna Moy, "US Labor Market Performance in International Perspective", that appeared in June 2002.

Untitled Document
Unemployment Rates in Selected Countries 2005
USA Canada Australia Britain Japan France Germany Italy Sweden
5.2 6.1 5.1 4.8 4.5 10.2 12.0 10.0 6.3
Source: US Bureau of Labor and latest newspaper reports

Job-Creation 1960 - 2000

When we look directly at the data for job-creation, you can see from the following chart just how wretched the record has been for the big Four EU countries --- a paltry 15% increase over 40 years compared to 1960. Again, keep in mind that Britain's performance --- cross-checked with the unemployment rate for early 2005 --- improved comparatively to the other three EU countries throughout most of the 1990s and especially into the current decade. By contrast, Canada managed to boost the number of jobs by almost 250%, and the US by nearly 210%. As for Japan, its performance was sub-par too --- a rise of about 45% in the number of jobs compared to 1960. It only looks good compared to the EU record.

VI. One Final Introductory Set of Comments:
The Rippling Changes Unleashed in Global Capitalism

Repeatedly, up to now, we've talked about the varying ability of the market-oriented and state-capitalist countries to adapt to the thrusting, far-reaching changes that mark global capitalism these days. A question immediately prompts itself here:

What Are Those Changes, Which Require Industrial Countries to Carry Out Creative Destruction and Innovate Across-the-Board?

Four related changes of a relentlessly high-pounding sort --- full of flux and powerful pressures on industrial and developing countries alike to adapt to them --- have been unleashed the last few decades, picking up ever greater momentum into the current century. Only those industrial countries that have generally allowed the forces of creative destruction to play out freely --- we're talking about the English-speaking market-oriented ones --- have been able to adapt effectively to them. The following summary discussion --- fast and top-skimming as its pace may be --- has at least the virtue of highlighting the core nature of each of these changes:

1) The growing impact of revolutionary technologies, especially in information and communications sectors and biotech (with nano-technology's promises looming just on the horizon);

2) The ever increasing tempo of fast-moving globalizing forces in trade, portfolio investment, and multinational investment and extensions world-wide . . . obviously an offshoot in part of these technological breakthroughs in ICT.

3) The bursting emergence of powerful industrial rivals in Pacific Asia and India. China and India alone have nearly 2.4 billion people --- half of all those living in the world's developing countries. To which should be added the challenges especially to the EU-15 countries of West Europe of new, low-wage industrial countries with hard-working labor forces in East Europe and the former Soviet Union.

4) Vast military and diplomatic changes that are is still influencing most of the world's countries, especially those with great-power pretensions: the end of the cold war, the collapse and disappearance of the Soviet Union, ditto for Communism, and the emergence of a unipolar global system of power centered on the US. Not the least of the high-pulsating spillovers has been the disappearance of a common threat that held the Atlantic Alliance together for 41 years of its turbulent history; and its place, the surge of a new threat --- radical Islamist fascism, particularly its terrorist wings at a time when weapons of mass destruction might fall into their grip --- that hasn't provided nearly the same degree of unifying cooperation in the expanded NATO that the Soviet threat once did. Just the opposite.

Observe quickly. As significant as these military and diplomatic changes happen to be, they aren't directly relevant to the current buggy series, and so they'll be put in cold-storage for the time being. Note, though, that in 2003 prof bug published several article on their continued, far-reaching effects --- especially for US foreign policy and US-European relations. Click here for a couple of the main ones:


I. Schumpeterians and Mainstream Economics

Schumpeter Kept On The Margins Until Recently

As a general thing, despite his path-breaking work on long-term economic development that he developed from the 1920s through the 1940s, Schumpeter's influence in economics tended to be limited until the late 1990s to a fairly small if highly productive group of institutionally inclined economists in Britain and the US . . . especially in the papers and the books written or edited by
Richard Nelson of Columbia.

In part, that was because their work wasn't formalized in statistical models and then tested with data sets --- something that's de rigueur in economics these days; in part too because Schumpeter and neo-Schumpeterians differ noticeably from mainstream economists in their views of capitalism. Mainstreamers tend to think in terms of economy-wide equilibrium; they apply marginal analysis to economic behavior; and even growth theorists who take technological progress seriously don't relate it to the shock-waves of revolutionary technologies that come in long-term clusters every few decades. If anything, the notion of radical, tumultuous changes in the nature of capitalist economies --- which are constantly buffered by their technological and global environments --- is alien to mainstream growth theory, even though it is at the core of a Schumpeterian view of capitalism, a system constantly forced to change in dynamic ways.

As for the role of institutions in shaping a country's long-term economic growth, mainstream growth theorists have only recently begun to recognize their importance --- including those institutions in the legal, political, and administrative realms --- and they still don't relate them to the key Schumpeterian insight into the recurring impact on a country's economic status-quo caused by the disruptive gales of creative destruction. By the same token, they shy away from conceptualizing a country's institutional interactions as creating an economy-wide network --- a distinctive system of national innovation, for good or bad.

Recent Changes

Fortunately, all this neglect of Schumpeter and neo-Schumpeterian follow-up work has begun to change in the last decade, especially after 1996when, at long last --- a good two decades or more into the modern pc era --- the managers and work-forces in business firms had finally moved up sufficiently on a learning curve to begin reaping the productivity gains inherent in the ICT-breakthroughs . . . swarms of them, some a good 20 years old by then.

Nothing new in this delay, mind you. It took a good 3-4 decades after Edison's great innovations in electricity before most of urban America was finally electrified, with all the huge changes in our lives that followed. Similarly, the internal combustion engine was invented in the 1880s and 1890s in different countries, but until Henry Ford produced the Model-T car after WWI --- using entirely revolutionary assembly-line techniques of production --- autos had been little more than play things for rich people and eccentrics.

So, to repeat, the big boost to American productivity and the growth rates in it and per capita income that occurred after 1995 focused anew the attention of mainstream growth theorists on the roles of radical technological innovations as the main-driver of economic revitalization and growth . . . all to the benefit of Schumpeter and the neo-Schumpterians like Nelson.

The rapid expansion of the Internet by the late 1990s, including the bursting activity of e-commerce and b-commerce on the World Wide Web --- well over a trillion dollars a year now and growing rapidly --- further increased the growing interest in Schumpeter's work, now something of a cottage-industry. And with good reason. For Schumpeter's theoretical insights --- which were never mathematically formalized and so were pushed aside by mainstream growth theorists until recently --- are by far the most applicable to explaining the great leap forward in American productivity growth from 1996 on . . . a sustained doubling of the annual rate that had marked the US economy over the previous two decades: from about 1.3% annually to 2.7% between 1997 and 2000 and an astounding 3.9% from 2001 through 2004.

By the same token, his theoretical work and insights help us understand why both Japan and even more the EU countries have had trouble upping their rates of productivity the last decade or so.

How So?

Quite simply because, to repeat, Schumpeter is pre-eminently the pioneer and most profound theorist of how long-term economic growth in capitalist societies is driven forward not just by technological progress --- the latter concept formalized and incorporated into what became known as endogenous or New Growth theory in the 1980s (with little or no reference to Schumpeter's work) --- but rather by something more profound and far-reaching: namely, by long-term waves of revolutionary technological breakthroughs that create entirely new industries and products of a profoundly restructuring sort for the ways in which people live, work, and spend their leisure.

You want examples of such radical breakthroughs?

We mentioned a moment ago those in information and communications. If you want an even more graphic example, think of what life and work and the economic landscape were like in America or Europe in the late 19th century before the new industries and firms began to multiply that created the new electrical and automotive industries in the early decades of the 20th century and all the spin-off industries and products that followed. They thoroughly revolutionized our lives and work sites --- think of the faster pace of urbanization, then suburbs, then changes in social mores brought about by the mobility facilitated by cars --- and no less revolutionized the ways we spent our leisure, sexual mores, and the roles of women in society, including the impact of radio, movies, drive-in movie theaters, new forms of advertising, TV, fast-food restaurants, super-markets, the purchase of housing and cars and other consumer durables with entirely new forms of installment purchases.

II. Enter Institutions and Socio-Cultural Influences
(Including the Buggy Twist on Ideologies)

Varying Abilities To Innovate and Adapt To Radical Change

Ponder anew what we've touched on already. Specifically, for Schumpeter and even more his followers like Richard Nelson, the ability to quickly exploit such revolutionary breakthroughs and bring them successfully to the market-place --- never find diffuse them across industries and then throughout the overall national economy --- varies across countries. Nelson and his colleagues, you'll recall, lump their varying abilities under the concept of different systems of national innovation. What it means should be clear by now. The varying effectiveness of countries to innovate and adapt their economies to system-wide changes, dislocations and all --- whether rooted in technologies or globalizing forces ---- depends on three pivotal components in their national systems of innovation:

1. It depends on the flexibility of their institutional structures and governmental policies, including clear limits on the intrusions of the state into markets and the logic of market incentives and adaptability to dramatic change in the economic environment. That doesn't mean laissez-faire. The market-oriented economies of the US and the other English-speaking countries are hardly late-Victorian systems. Even so, their public-and-private sector interactions clearly distinguish them from the intrusive regulatory apparatus and high levels of governmental spending that mark the economic life of statist-capitalisms . . . not to forget how the logic of politics and political maneuverings in Japan and the EU countries trumps the logic of markets whenever major changes in the economic status-quo move onto the agenda.

2. It also depends on certain key socio-cultural features in any country that help shape individual outlooks and behavior and have a direct economic impact: above all, on the ability to educate and supply boldly imaginative inventors and no less bold, relentlessly driven entrepreneurs who dream of success and glory in the marketplace.

Superior institutions on one side and highly creative inventors and devil-may-care entrepreneurs indifferent to risks and failure go together, of course. Nowadays, to put this more concretely, highly promising entrepreneurial start-up firms need an array of supporting institutions and government policies if they're to succeed in bringing to support entrepreneurial start-up firms that will bring revolutionary technologies to the market-place . . . then flourish and grow and spread their newer productivity-powers to surrounding industries and eventually on an economy-wide basis.

3. And it further depends on a population whose individual members demonstrate flexibility in their lives and manifest a relatively optimistic attitude about change and the future. Call them, if you want, adaptable --- even mobile --- people with a future-orientation. Things might not be good today. They will improve in the future, particularly if individuals are willing to show personal initiative, shift jobs, change careers --- drop out of universities, work or travel the world, return later, and maybe later still --- and move about the country in search of a better life as they themselves define it. All this, of course, requires both risk-taking and a conviction that even if you fail at something, failure isn't excessively punished.

Two other national traits are relevant here.

If a country of creative individuals and a flexible, forward-looking population can also count on the vast majority of its citizens being able to cooperate spontaneously for collective purposes --- reflected among other things in an array of voluntary associations and a strong sense of shared national identity and purpose --- then it is doubly advantaged when it comes to technological creativity and innovation. The chief reason? In such circumstances, its formal institutions --- whether organized as giant corporations or start-up firms or universities or public agencies --- can usually count on their main objectives being carried out quickly, with self-generated compliance, instead of having to rely solely on the heavy hand of formal rewards and sanctions as the source of their employees motivation and incentives.

If, simultaneously, that same country is open to talent from everywhere in the world --- through long traditions of immigration and with universities that seek out creative scientists, engineers, and other scholars world-wide too --- then its national system of innovation will be markedly enhanced.

What follows?

Essentially this. When these three conditions are present in a country, its system of national innovation will be uncommonly flexible and creative, and its people generally willing to let the stormy gales of creative destruction play out freely in their economic lives.

Otherwise --- as in the statist-capitalist countries to a marked degree --- the economic status quo will remain rigidly resistant to radical change. Nor is that all. Efforts at major institutional and policy reforms will be largely frustrated, it now seems clear, by the interplay between powerful vested interests on one side --- big business, small business associations, trade unions in the private sector, trade unions in the public sector, and financial institutions --- and electorates, parties, and politicians eager for election or r-re-election on the other. Not to forget the fears in political circles of widespread social conflict and strife if radical policy reforms actually reach the public agenda.

A Question Rears Up Here: Are These Institutional and Individual Traits Set Out Too Ideally?

Possibly, but they do fit the American people in the large . . . and to an extent those in the rest of the English-speaking countries as opposed to Continental Europeans and Japanese.

Ponder the evidence here, both anecdotal and harder.

The Germans and Latin countries are notorious for the pessimistic and even anxious attitudes of their citizenry, mind-sets that reflect their tumultuous, violent histories, full of ideological extremism and clerical and anti-clerical struggles, not to mention racisms. Even these days, cultural and existential pessimism seem to mark their intellectual and artistic life in almost every domain --- witness the fears about globalization, their worries about their economic stagnation, and their divided mind-sets about American cultural intrusions; and simultaneously, Europeans tend to find American adaptability, willingness to move from one locality to another, and develop friendships in a loose, freewheeling manner as signs of personal immaturity and superficiality. Les Americains: Sont-ils Adultes? was a best-selling book in France a few decades ago. The answer in the book ought to be obvious.

Harder Evidence

Can this anecdotal evidence be backed by survey data? Yes, and in fact by a very recent Harris poll (January 2005) carried out in the US and compared with Eurobarometer survey results of the EU-25 countries taken a year earlier. The results in summary fashion were the following:

  • Americans, to no one's surprise, turn out to be "unusually upbeat and optimistic." They are noticeably more likely than Europeans "to say that their lives have improved over the last five years, and to expect that their lives will improve in the future"; and what's more, that's the case "whether they are thinking of their personal lives, their employment or financial situations, or their countries' economies."

  • As for individual countries, Germany was the "most negative or pessimistic of" in Europe, and Britain "tended to be somewhat more optimistic", but less so than Americans across-the-board. Respondents in France and Italy tended to be only slightly less pessimistic than Germans except on one category: they were much more inclined to think their personal lives will improve in the next five years. Spain, interestingly, turned out to be the least pessimistic of the West European countries.

Keep in mind one thing important about the comparative results. The Eurobarometer survey, recall, was taken in January and February 2004, a good year before the Harris poll in this country. Since then, the West European continental-countries have experienced nothing but mounting economic trouble except in Spain and to an extent Denmark and Sweden; and so the survey results today would no doubt reflect far greater pessimism about their individual people's live, today and in the near future. How much more so isn't just speculative. A June 8th , 2005 poll showed that 7 of the most 10 pessimistic countries in the world about their economic future were EU members.

Does this might just reflect a realistic appraisal of their countries' economic doldrums? Sure, no doubt to an extent it does. On the other hand, the rife pessimism envelopes EU institutional matters too. As the recent rebellions of the electorate in France and Holland regarding the proposed EU constitution show, even the EU seems to be coming in for opprobrium as people rebel against the failures of their mainstream political elites and are looking for scapegoats to blame their troubles on. It's hardly surprising that there is growing electoral restiveness almost everywhere in the EU-15 Continental countries.--- above all, in Germany, Italy, Austria, Greece, Portugal, and Belgium. As for France, President Jacques Chirac's personal approval-rating is at an all-time low (24%).

Other Hard Evidence

Small wonder that a very good study of worker mobility in the late 1990s found that Americans were 50 times more willing to change jobs and move to another urban area for a better life than the average European. Similarly, a good Anglo-American study in the same era showed that 1 out of 11 American adults created a new firm every year. The corresponding figures in Europe were 1 out of 30 or so Britons and Italians, and 1 out of every 50 Germans and Finns, with the French in between the two European groups.

And Japan

In the study just mentioned, the Japanese turned out to be as averse to entrepreneurial risk-taking as the Germans and the Finns. More generally --- for all the flexibility they showed after the Meiji revolution of the 1860s and early 1870 in assimilating western science, engineering, technologies, and organizational structures --- the Japanese turn out to be no less reluctant than the Continental Europeans to take risks, change jobs and careers, and try to remake their lives . . . even if the powerful social constraints that impose conformity and constrain individual behavior would allow them to.

Little surprise, then, that after almost 14 years of economic stagnation, Japanese business owners and managers --- of both big and smaller companies --- turn out to be the most pessimistic in the world about their country's economic prospects, and by a noticeable margin. The results are captured in a very recent International Business Owners' Survey carried out in numerous countries around the world. What is surprising is that Indian businesses seemed the most optimistic of all.

Consider Another Striking Piece of Data for the US, Japan, and the EU Countries.

A good 75% of the Fortune Five Hundred giant corporations in the US didn't even exist in 1975, essentially the starting point when the radically restructuring technologies in information and communications started erupting into existence and the relentless forces of globalization began to tear ahead with break-necking speed. And in the EU and Japan? There's been virtually no new giant corporations of any sort, let alone on the technological frontier, in either place --- Finland's Nokia and Germany's S.A.P., both world-class pacesetters, the notable exceptions, plus Airbus . . . heavily subsidized by various EU governments, much to the benefit of air travelers world-wide, whatever the particular merits of Boeing's and the US government's charges that these subsidies are at odds with the WTO charter.

And, just for the heck of it, we'll end this article today with some comments by a Swiss professor who helps run the annual IMD survey of economic competitiveness across dozens of countries --- the survey itself based on over 300 different criteria (mostly quantitative) as well as on a poll of thousands of business executives around the world. As usual, it ranks the US no. 1 on these categories. The professor, interviewed recently by
the Washington Times, voiced the following views about American strengths compared to the West European countries;

Q: The United States has again been ranked No. 1. What are the main factors keeping the U.S. at the top?

A: I think one of the essential competitive advantages of the U.S. is not only the ability to develop technology, but to rapidly transfer new technologies into the private sector and apply them to products and services. I think this is probably the biggest difference between the United States and Europe.

In Europe, we have a tendency to develop a lot of innovations, but keep them in research institutes or in laboratories. In the U.S., there is this unique ability to develop technology and put it very quickly into enterprise. Entrepreneurs are very often people who have invented something, and I think this is the key competitive advantage of the United States.

The second aspect is, of course, that the U.S. has wonderful mobility in terms of people. I think it's quite impressive to see how quickly Americans move from one region to another one in the United States -- and from one cluster of competitiveness to another. I think this combination of technology and mobility is really one of the key aspects explaining the success of the U.S. today.