The English-speaking countries --- the US, Britain, Ireland, New Zealand, and Australia --- all adhere to a much more market-oriented capitalism. Canada's economy as we saw in the previous article --- we'll touch on it again later here --- is a more mixed affair, thanks to several decades of almost monopoly rule by the Quebec-based Liberal Democratic Part that moved the country's economy in a EU-Continental direction. Don't forget too. Between 1945 and the start of the 1980s, the other four English-speaking countries besides the US had themselves institutionalized an elaborate form of statist-capitalism that was very similar to the sort found on the EU Continent.

All that changed in the 1980s

After a good 35-40 years experience with their state-dominated economies, more and more Irish, British, New Zealanders, and Australians had to recognize reality: that system had stymied their economic growth and dynamism, leaving most of them increasingly discontented. In all four countries, highly determined, reform-minded governments on the right were then elected that carried out large reductions of regulations, welfare-transfers, government spending, and taxes in order to revitalize their economic vigor. The reforms added up to a clear transformation of their economies in market-oriented ways, much to their benefit. Even the US --- which had never developed an elaborate regulatory and welfare-state system --- began to de-regulate in the late 1979s and eventually to reduce the levels of taxes and welfare-transfers over the next two decades.

 

Don't Be Misled Here

To speak of market-oriented reforms and transformation is not to talk about laissez-faire capitalism. The idea's something of a red herring. Only Britain in the mid- and late-19th century had ever developed a capitalism of that sort, and possibly Hong Kong under British rule in the late 20th century.

The United States itself never did have a laissez-faire economy.

Throughout the 19th century, both federal and state governments played an active role in fostering an impressive infrastructure --- especially in various kinds of transportation; the federal government owned most of the land in continental America and handed it out to millions of homesteaders; and free trade did not flourish in most of that century. Then too both the federal and state governments worked closely with higher education after the civil war to ensure a constant supply of practically trained scientists and engineers. As for business regulations, the US led the way in anti-monopoly legislation, but eventually all five of the dominant English-speaking countries had developed all sorts of regulations before WWII to deal with giant corporations and to ensure the health and safety of many industrial and agricultural products. Similarly, the US initiated its own social-security system in the late 1930s, just as earlier, before WWI, it introduced a progressive tax system. Starting in the 1970s, despite the deregulatory initiatives of the Carter administration --- followed in train by the Reagan, Bush, and Clinton administrations --- environmental legislation took root and expanded, as did more inclusive health-and-safety regulations for the work force and consumers.

In short, we're not talking these days about a stateless economy in the English-speaking world. The role of governments at various levels of the state in existing market-oriented countries isn't negligible. Keep this point in mind. More basically, keep another, more pivotal point at its forefront: despite the state-role in the English-speaking countries and some minor market-oriented reforms in Japan and the EU Continental countries over the last decade or so, the core difference between the two kinds of industrial capitalism is still easy to pin down.

 

What Is That Core Difference?

Simply this: when it comes to handling the unleashed changes in global capitalism the last two or three decades --- revolutionary technologies, the rapid-fire expansion of trade and investment flows, and the surging rise of new industrial countries in India and Pacific Asia --- who makes the key decisions in each system of capitalism? Decentralized market-based actors --- business firms, workers, R&D specialists and inventors, consumers, and private investors and shareholders? Or state-based political actors --- politicians in power, opposition parties, and key bureaucrats --- as they interact with powerful, politically mobilized interest groups and the electorate?

The answer to these questions is crucial for understanding the superior economic performance of the market-oriented countries of the English-speaking world. First, though, we need to clarify the nature of that performance on key economic indicators.

 

...........................................................

A question prompts itself here . . . :

What Do We Mean By A Superior Economic Performance?

It's already been dealt with, recall, in the previous buggy article. Two baseline criteria enter into measuring the performance of any national economy: its rates of growth in GDP and per capita income over a sustained period of time, and its job-creation --- as reflected in the number of new jobs created annually in the same time-span, but also in two other ways: its current unemployment statistics, especially long-term structural joblessness, and in the percentage of the adult population (18-65 years in age) actually employed.

Sidebar Note: The causes of long-term growth rates in per capita income --- the key concern for growth-theorists --- are another matter, not dealt with here . . . though they have in the earlier articles in this buggy series, and at length.

It's enough to recall that sustaining long-term growth in per capita income depends, at first glance, on rising levels of capital inputs, labor inputs, and technological progress. The real key over the long-run is continual technological progress. Technological progress, though, needs to be interpreted as not just better and more efficient machines or even new products, important as they happen to be, but rather anything that raises the growth rates of labor productivity --- and also of capital productivity and multi-factor productivity --- and hence that continues to shift an increasingly complex national economy toward more and more qualitative-based growth.

What underlies that shift to qualitative growth, note, isn't technological change by itself. It's also the crucial need to let the disruptive Schumpeterian gales of creative destruction play out over the economic landscape of a country . . . especially when the technological breakthroughs are of a radically restructuring sort that strike every 50-60 years in clustered long-term waves. Only when all that happens will old, relatively low-productivity firms in older industries either restructure and update successfully or go bankrupt, allowing scarce capital, skilled labor, and managerial talent to shift into more promising, more productive industries. Without such continual qualitative improvements of this sort --- technological innovation and the shifting reallocating of scarce labor and capital to newer, more promising industries --- what will happen to an economy's long-term growth rate?

The answer: it will remain largely quantitative-based and eventually fizzle out. Technologically inspired change won't diffuse throughout a national economy. By themselves, to put this point bluntly, more and more capital investment and labor inputs will be used inefficiently --- read: wasted --- and lead to a dead-end of ever greater diminishing returns and economic stagnation; nothing else . . . the fate of the Soviet and other Communist countries.

And in a way, at far higher levels of per capita income, it's also the recent fate of dual-economies in statist-capitalist giants like Japan and Germany.

Each of them has a few high-quality, high-productive export-oriented firms and industries, but either fairly low productivity --- or stagnant productivity growth --- in other sectors of the economy . . . including wholesale and retail industries and most other service industries, themselves heavily protected against both domestic and foreign competition. Generally, it's true, Germany has a higher level of labor productivity than Japan; but its inability to create new jobs, stimulate entrepreneurial activities, improve the relatively low level of its capital productivity --- which, as in Japan, is about a third lower than in the US --- and come to terms with its over-regulated labor and product-markets makes its fizzling performance very much like Japan's. The reform efforts of the Schroeder government, belatedly introduced more than six yers after it first came to power, scarcely got under way in early 2005 than big backlashes in public opinion brought them abruptly to a halt. On the credit side of the Japanese economy, by contrast, a hard-work ethos still seems in place . . . something the Germans can hardly claim these days. And unlike the best German companies, several of the best Japanese companies are prominent global players in advanced information and communications technologies. Since 1995, revealingly, both countries have grown at an annual GDP rate of 1.3% . . . about 60% below the US rate.

At a more basic level, if you were to ask --- as the buggy prof has in this series of articles --- why the market-oriented English-speaking industrial countries have done far better for two decades in making qualitative --- or technological-based --- improvements in their rates of economic growth and job-creation than the state-capitalist countries, you get down to questions of institutions and ideologies . . . or, in Schumpeterian terms, different systems of national innovation and how and why they evolved as they have.

So, to repeat, the key criteria of superior economic performance are the growth rates in GDP and per capita income and in job-creation over a long period of time. There may be other criteria that are important for some observers --- 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

	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

Source: World Bank

 

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.

Unemployment Rates in Selected Countries 2005

	USA	Canada	Australia	Britain	Japan	France	Germany	Italy	Sweden
April 2005	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

 

Employment Rates in the EU and US By Gender and Age. Also Hours Worked Per Year

This breakdown, nicely prepared recently by the US Bureau of Labor, gives you a better idea of employment across several key categories here and in the EU.

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.

(3) . . . When It Comes to Fundamental Economic Change, Who Makes Key Decisions in Each System of Capitalism?

(i.) The English-Speaking World

The question just posed brings us briskly back to the core difference between the two kinds of industrial capitalism . . . at any rate when it comes to high-powered changes in the economic status quo. In the market-oriented countries, the balance of power in key economic decisions regarding these changes has shifted away from governments and political policymaking toward decentralized market-oriented actors: to business firms, financial firms, networks of creative inventors and R&D specialists, entrepreneurial start-ups, trade-unions, individual workers, consumers, and equity shareholders.

True, executive, legislatures, and Central Banks aren't just passive spectators in the US and other English-speaking countries. Nobody denies that.

After all, good monetary policy is as significant as ever, and decisions about tax rates, deficit spending, and welfare transfers remain in the hands of executives and --- especially in the US --- powerful legislatures. No country has thoroughly deregulated its economy, and to repeat, we are still a long way from some ideal laissez-faire economy of the sort, say, true-believing Libertarians dream about. Trade policies are also decided by politicians and political parties. Even so, it's hard to deny the big shifts in the balance of decision-making power when it comes above all else to how the English-speaking countries handle the forces unleashed by revolutionary technologies and global capitalism since the mid-1970s and who decides largely in their economies how to adapt to these relentless forces and pressures.

Witness above all . . .

 

The American Economy,  the Most Illuminating Example

The shift in decision-making power to decentralized, non-state economic actors is especially noticeable in this country. All over, vigorous interaction between universities, technological institutes, and business firms has flourished for decades now --- and especially since the end of the 1980s --- as a means of nurturing cutting-edge technological breakthroughs. That's true in ICT, bio-tech, and nano-technology . . . and to a lesser extent in alternative fuel systems. All sorts of complex economic networks crisscross one another at hundreds of localities around the country to finance and carry out systematic R&D in these technologies, often with local governments providing subsidies to nearby universities and to start-up firms in advanced technological areas. Take UCSB in the Santa Barbara area. Both it and UCLA have joined with several private corporations to create the world's most advanced institute at UCSB for advanced R&D in nano-technology --- working at the molecular level of materials; they have backed their commitments to the tune of a good $500 million dollars The UC system is public, but non-governmental. The business firms are in the private sector. Formal government agencies are noticeably absent from this network.

In the Silicon Valley south of San Francisco, both new start-up firms and giant established corporations --- working closely with Stanford, San Jose State University, and Santa Clara University --- continue to press forward with vanguard work in ICT, and venture capitalists are again almost as active as they were in the 1990s. Similar stories abound all around the country.

And though the pace of entrepreneurial start-ups in the high-tech areas has slowed down compared to the mid- and late-1990s, it remains vigorous and will no doubt flourish in high-tech areas --- including ICT and nano-tech and maybe even alternative fuels --- as far into the future as anyone can see.

 



(ii.) Why The Forces Opposing Basic Economic Change Have Prevailed
in The State-Capitalist Countries, But Not in English-Speaking Ones

Agreed: a long sub-section title: still, accurate enough. And now a caution: slow your pace of reading a bit in this section. It brings us dead-center to the core difference between the ways pivotal economic decisions are made in the two kinds of industrial capitalisms.

 

Politicians and Political Parties Are Motivated Similarly in Both Systems

Yes, similarly . . . and for reasons set out at length in Part Two of the argument today, where the theory of public choice is introduced and probed in depth (including some of its drawbacks). For the time being, just take what follows for granted.

Start with the English-speaking countries.

If decentralized private, public, and quasi-public networking and decision-making --- which mixes bouts of both cooperation and competition --- have prevailed as the key force behind all the recent, dislocating economic changes in the US economy since the start of the 1980s or in the other English-speaking countries, it's not because American, Australian, Irish, New Zealand, or British politicians and political parties are any less self-interested and short-sighted than their counterparts in Japan or in the EU. They aren't. There's no evidence they are. None of them are any less interested than Japanese or European politicians in winning election or re-election, or any less mindful of the short-term benefits to themselves if they reward their constituencies--- campaign donors, important interest groups, their voters, and the undecided in the electorate --- with this piece of legislation or that one, whether reduced taxes, more subsidies, more welfare transfers, more regulation, more protection against domestic or foreign competition.

 

Especially in parliamentary systems the new legislation can be quickly introduced and passed . . . the benefits accruing immediately to the government's constituents. Or, given the latitude of decision-making available to powerful central states in the state-capitalist countries, they can do what President Jacques Chirac's conservative government announced a few weeks before the French votes on the recent EU-constitutional referendum: announce a pay-raise to the country's 10 million state-employees. The long-term costs of constantly rewarding various privileged groups and voters this way don't show up right away. They may even take not just years, but decades to materialize.

 

 

The Motives of Other Political Actors

Begin with the other key players in the executive branches of government, powerful bureaucratic heads.

Are those in the English-speaking countries any less self-interested than Japanese or European bureaucrats? No, there's no evidence to that effect. Like bureaucrats everywhere, American, British, Irish, Canadian, Australian, and New Zealand bureaucrats all want to defend or expand their budgets and existing tasks. That's one of the major ways they gauge their success, even if outsiders have different views. Similarly, at all levels of the bureaucratic hierarchy --- the very top, the middle management level, and the rest --- civil servants are as interested in their careers, promotion, power, and salaries as their counterparts in giant private corporations.

Come to that, is there a noticeable absence in Britain, Ireland, Australia, New Zealand, Canada, or the US of powerful vested interests that seek to guard the economic status quo and stymie fundamental? No, not really. They abound in all sectors of the economy and society, seeking to frustrate changes that would harm their existing interests.

 

Only --- and here's the core point to be made ---

These powerful vested interests, massive bureaucracies, and self-interested politicians don't succeed nearly as well as their counterparts in Japan or West Europe at frustrating fundamental economic change.

The overwhelming reason why?

Tersely put, institutional limits on the role of the state in both political reach and economic life ensure that most of the key decisions about the pace and direction of change will be made at decentralized levels, between business firms, financial institutions, university research teams, and members of the networks that cross and blur all sorts of boundaries between strictly private, public, and quasi-public actors. In some of the English-speaking countries --- notably Britain and the US --- even the central banks are non-governmental, not dependent on the state and political support for their primary functions as an overseer of the banking system and above all of monetary policy.

 

Switch now to the state-capitalist countries. It turns out --- to rephrase this pivotal point --- that

 

(iii.) In Statist-Capitalisms, Dominant Decision-Making Power
in Key Economic Matters Is Organized and Operates Differently

No exaggeration: very differently.

In Japan and West Europe, state influences and political decision-making tend to prevail over market influences and private-sphere decision-making when it comes to the disruptive thrust and flux of these radical changes. What follows is on display almost all the time. It is especially evident whenever these radical changes prompt some reform-minded government to alter the economic status-quo and make it more flexible and competitive. Instantly, surging backlashes by the electorate or by backbench members of the parties in power or by powerful vested interests --- business, labor, financial, agricultural, environmental, cause groups, and the like --- immediately erupt and either halt the reforms or force a retreat. At most some reforms around the edges of the existing status-quo will be implemented.

Is any of this surprising?

Hardly. In state-dominated economies --- tightly organized and focused on strong state decision-makers --- the logic of politics tends to trump the logic of markets, and political calculations and maneuverings dominate market incentives and adaptability (including lots of vigorous entrepreneurial activity) when it comes to coping with these dislocating changes in these countries' economic and technological environment. The point can be rephrased in key Schumpeterian terms. Specifically, the gales of creative destruction don't unfold quickly or freely within the national economy and compel old, increasingly uncompetitive industries either to pare down and restructure thoroughly or go bankrupt.

 

What Then Ensues Is Self-Destructive for Economic Flexibility and Vigor.

This point in bold blue can't be over-emphasized.

Only by means of creative destruction can enough scarce capital and human talent be freed up to allow new start-up firms --- created by obsessed, powerfully driven entrepreneurs --- to grow, flourish, and spread their productivity-enhancing spillovers across one industry after another and ultimately rejuvenate the entire national economy. Without creative destruction, there's no updating --- no rejuvenation; not of a far-reaching sort anyway. The national economy with its high-wages remains stuck in its rigid status-quo, despite an increasingly faltering economic performance.

Against this background --- which, remember, is a summary statement of the more complex argument unfolded in the previous two buggy articles --- shift your attention now to the pivotal outcomes of the two kinds of industrial capitalist countries:



 

Part Two:
WHAT EXPLAINS THE SUPERIOR PERFORMANCE OF THE ENGLISH-SPEAKING COUNTRIES? THE ROEL OF INSTITUTIONAL ANALYSIS

The Buggy Analytical Framework Clarified

Given all of what we've said in part one, a key question immediately rears up here. What are the causes of this contrasting economic performance, with the state-capitalist countries of Japan and in West Europe faltering badly for the last 15 years, if not longer?

The question brings us briskly back to the analytical framework used throughout this buggy series that started in early May 2005, and for that matter the wider, more ambitious series on different ideological heritages and how they shaped the institutions and policies that prevail in the two kinds of industrial capitalism the last several decades. That latter series, recall, began in December 2004, focused mainly on the unique heritage of the US both on the left and right, even though it recognized a considerable overlap between all the English-speaking democracies in both institutional and ideological matters. And the answer to the question?

To explain the different economic performance of state-capitalist and market-oriented countries, the two buggy series have entailed a one-two explanatory punch

• The lead analytical thrust is a series of sharp jabbing institutional points about the different ways in which politics and economics are organized in state-capitalist and market-oriented industrial countries.

• The second and decisive punch hammers away at ideological explanations. In particular, different ideological heritages separate the English-speaking countries from Japan and those on the West European Continent . . . with the differences particularly great for the German-speaking and Latin countries, and less so when it comes to Holland and the tiny Scandinavian countries.

Observe carefully. The current section of our argument --- Part Two, to be exact --- deals only with institutional influences, though in extended ways that haven't been dealt with in earlier buggy articles. The powerful impact of ideological heritages in helping to shape the contrasting institutional organization in state-capitalist and market-oriented industrial countries will be set out and clarified in Par Three.

 

(i) THE LEAD ANALYTIC THRUST:
A SERIES OF SHARP, STEADILY JABBING INSTITUTIONAL POINTS

Repeatedly, in bursts of jabs, crisp hooks, and occasional sweet-punch analysis, the buggy argument has hammered away the last few months at the far different relationship between states and markets that prevail in the state-capitalist and market-oriented countries. The biggest difference? In a word, the sharply contrasting ways decisive decision-making power is exercised in each system . . . especially when it comes to key institutional and policy matters.

That contrast, note quickly, is important even in fairly stable times --- say, the 1950s and 1960s --- when global capitalism and technological change aren't full of flux and dislocating turbulence. It was in those two decades, even after most historical levels of poverty and unemployment were sharply reduced in the state-capitalist countries, that government spending began to surge rapidly. It continued, oddly, to grow sharply for another two decades even when economic growth slowed down noticeably and unemployment began to rise rapidly . . . of the long-term structural sort, not cyclical. Obviously, something else besides a shared political concern to help the needy and the poor was at work in West Europe and (later) Japan.

At no time, though, does the contrast in decisive economic decision-making seem greater than when flux and turbulent uncertainty are unleashed in global capitalism and relentless pressures are exerted on the advanced industrial countries to change or maintain the basics of their economic status quo. That's been the case for a good two or even three decades now. In this long, unsettled period of tumultuous change and uncertainty, the economic performance of one state-capitalist country after another has spluttered and backfired . . . and in none no more so than in the once highly touted future hegemons of the capitalist world, Japan and Germany.

 

All This Should Be Familiar To Buggy Readers By Now.

So familiar that, in truth, there seems little need to say more here than a few brief reminders of what any countries' institutions --- especially those relevant to their economic performance --- amount to. The most relevant are easy to pin down: political, administrative, legal, financial, and business-organizational, all examples of formal institutions, plus the informal but important role of socio-cultural influences in helping to determine how these formal institutions operate in concrete situations. Or more accurately put, how individuals holding positions in the concrete organization in which institutions --- formal rules --- are embodied actually operate and behave.

For the moment, don't worry about the definitions in the last paragraph. We'll clarify them in a jiffy.

The key point to remember for our buggy purposes is that it's the concrete ways in which these institutions are organized and operate --- particularly when it comes to determining the balance of decision-making power in dealing with economic change --- that distinguish state-oriented capitalism from the market-oriented capitalism of the English-speaking countries.

 

Some Definitions and Examples.

(i.) Recall from the earlier buggy articles that institutions are not the same as organizations. They refer, instead, to highly patterned rules of behavior that are both formal and informal.

Formal institutional rules are easy to spot in any complex national society: they are enshrined in its constitution, its statutes, and its governmental regulations. In turn, these institutional rules spawn a host of concrete organizations that operate according to them, even as they enforce the rules in specific situation and can change them in defined manner. The more modern and complex the national society, the more specialized organizations there will be. Think of legislatures, executives, law courts, the police, and bureaucratic agencies in the public sector, and in the private sectors small businesses, corporations, financial organizations (banks, insurance companies, brokerage houses, and stock and bond markets), trade unions, political lobbies, newspapers, churches, schools, charities, and professional associations like the American Medical Association or the American Association of University Professors.

In the private, non-governmental spheres, corporate firms, trade unions, churches, interest groups, and professional associations like the AMA or AAUP are authorized by statutes or regulations to then set up and enforce their formal codes of behavior for their members. Their enforcement mechanisms vary: corporations enforce their rules by rewards for compliance --- promotions, higher salaries --- or sanctions like firing poorly complying employees. The AMA, like its equivalents in law, architecture, dentistry, plumbing, and so on, set their own standards for educating doctors and then certifying them after they've passed board-exams.

 

(ii.) An example will clarify how the formal rules in the political, legal, and adminstrative systems of a country relate to the private spheres of a national society.

Take religion. The relations between churches and public institutions and rules can vary even in rich industrial countries. In the US, constitutional rules stipulate that there should be a strict separation of religion and the state at all political levels, federal, state, and local. Churches, synagogues, mosques, and the like are then free to spell out their own criteria for membership and the practice of their religious faiths. Similarly, in the US, their property and income aren't taxed once they get formal legal recognition. In other countries, there is an official state religion --- say, the Anglican Church in Britain; and it enjoys a special status and derives some income from state-sources.

But note. Even in the US, if a religious organization operates in ways that conflict with legal-rights --- say, laws against racial discrimination or by means of fraud or encouragement violence against outsiders (a problem of certain mosques in this country) --- their behavior is then subject to the formal legal system.

 

(iii.) The rule-bound relations between the public and private sectors are doubly important for both democracy and successful long-term economic growth.

The wealthy industrial countries in West Europe and the English-speaking world have a wide gamut of voluntary associations as well as vigorous, profit-making business firms, all free of direct governmental ownership or controls (save for economic regulations over business firms). Is the existence of a richly endowed profusion of private and independent organizations in wealthy, democratic countries accidental here?

Hardly

In particular, without a vigorous free press, strong and independent political parties, trade unions, and a welter of voluntary associations, the political system of a country may be a formal electoral democracy ---Russia today is a good example, as are dozens of countries in the developing world --- but little else. It will generally be run by either a small oligarchy of elites or oscillate in electoral outcomes between small congeries of competing elites, each with their own elaborate patron-client networks. Neither solid democracy nor economic growth to Japanese or Western levels of per capita income will materialize in such circumstances. Only an energetic and flourishing civil society can underpin the kinds of solid democratic politics that mark the advanced industrial countries in Europe and the English-speaking world, and only vigorous corporate firms, entrepreneurial risk-taking, independent stock-markets and banks, and clear protection of private property will create the conditions of sustained economic growth that relies in the long-run on steady technological progress and other productivity-enhancing changes will bring a country into the league of advanced industrial countries.

Both --- solid democracy with a flourishing civil society and decentralized economic decision-making as the main engine of development --- seem essential to sustained long-term economic growth that brings countries out of poverty into the league of advanced industrial countries. Only Singapore, a tiny authoritarian country of energetic Chinese people, is the exception here.

• Hence the bankrupt failures of the Soviet Union, Maoist China, Cuba and all other totally state-dominated economies. The same is true of the economic backwardness of all the Arab countries: even those with lavish oil income would be economic basket-cases without petroleum. Ditto most of Africa, Central Asia, and two-thirds of Latin America.

• Will China --- still essentially a poor country, relying for its fast economic development on tremendous inflows of foreign capital and export-driven growth --- be another exception, like Singapore? It's unlikely. Despite some productivity enhancements and some technological progress, it is still overwhelmingly a quantitative economy that relies mainly on large inputs of labor and capital for its growth. That's a self-defeating strategy in the long-run. Sooner or later, it's bound to run into diminishing returns to capital investment. Only sweeping institutional reforms --- which in effect would require the 60 million members of the privileged Communist Party to self-destruct, shifting economic decision-making to decentralized private firms, banks, stock-markets, and R&D and other scientific workers to have full freedom of expression and exploration protected by independent legal courts --- will allow China in the future to shift from a quantitative to a qualitative-run form of economic development.

• The huge problems that Japan's state-dominated economy --- for all the laudatory technological talents of the Japanese people and a dozen world-class giant corporate firms like Toyota or Sony --- show what can happen to even a much smaller, far more homogenous country's economic performance in the long-run. Japan will be lucky as its population ages not to fall out of the ranks of the advanced industrial countries. Germany's fate may not be much different. Both countries emerged into the ranks of the rich industrial countries --- even before WWII --- thanks to far lower levels of state-domination: far fewer regulations, far fewer subsidies, far lower government spending, and much more entrepreneurial risk-taking and start-ups.

 

(iv). There are also socio-cultural influences at work in a country that determine how, in reality, individual power-holders and their agents in specific formal institutions and their organizational forms --- executives, legislatures, the courts, the police, business firms, stock markets, trade unions, political parties, and so on --- will actually carry out their roles and behave.

To clarify fairly quickly, these influences usually boil down to the following widely shared mental components.

• Widely internalized moral codes, particularly if they actually have any impact on individual behavior. Depending on the country in question, they may not --- especially on the part of the powerful and wealthy citizens.

• Internalized social norms that are specific to a particular group within a national society: families, family clans, ruling patron-client networks, or ethnic/tribal/racial groups. These social norms serve as motivating guidelines how the insiders in such groups should treat one another as opposed to all other outsiders in the country.

What lies behind the adherence of group-members to one another's mutual expectations about proper behavior . . . toward one another and toward outsiders? It's not the legal system of a country: obviously. The social norms --- or expected codes of behavior --- may even flagrantly with that system: think, if you want, of honor-killings carried out by the male members of Muslim families of the wives or daughters who have been forcibly raped by outsiders; or think of the Mafia, and how its shared social norms collide with criminal laws. Then, too, neither is adherence necessarily a matter of moral obligation: it may be, but it may not. Instead, what keeps the group-members adhering to accepted social norms is the fear of social sanctions: disapproval, ostracism, maybe even physical retaliation for violating the group's codes of behavior.

Double-standards, needless to add, can be rife in a particular country because of these fragmented social norms, resulting in blatant discrimination and sharp group-conflicts. Modern industrial democracies stress, officially, that the citizenry of their countries are all equal in fundamental ways; but even in these wealthy, long-standing democratic countries, some discrimination will exist toward outsiders on the part of the inside-members of a specific group. In most of the world's countries, the double-standards and discriminatory behavior are rampant and create a great deal of mistrust, suspicion, and conflict --- sometimes very violent conflict --- in their national populations.

• Widely shared cultural beliefs and expectations about human nature and --- particularly important for economic growth --- how individuals are to get ahead in a society, professionally, economically, and in social respect or prestige. Will advancement on these criteria be won by hard work and concrete achievement, or by who you know through family connections and by means of hierarchically structured patron-client relations?

• Widely shared views about change and the future. In some societies, even these days, pervasive fatalism exists about your own individual and family's destiny.

Traditionally, lots of religions even enshrined this fatalism: never mind, you'll be rewarded in the next life . . . even if that meant, in Buddhism or Hinduism, a better reincarnation. In other societies --- the US the prime example --- people tend to be optimistic about major changes in their lifetime: either on a strictly personal level, such as your ability to remake your existing life over and again, or on a national scale.

Take, as a highly relevant example for our buggy purposes today, the responses to a question asked in 1983: "Do you think it's still possible to start out poor in this country, work hard, and become rich?" Exactly 57% of Americans surveyed agreed it was possible; 38% disagreed. Today --- March 2005 to be exact --- 80% said that anyone could become rich in the US. Only 19% disagreed. It's attitudes of this sort, by the way, that drive the politically correct left up the wall. After all, all right-thinking people know that American capitalism is a plutocratic system structured to make a few rich at the expense of the masses, don't they? .

• And, something that reflects all four of these other sources, what the point and purpose of holding power and decision-making influence add up to in concrete behavior, as opposed to official rules and norms --- whether in politics, finance, the business world, the professions, or state-bureaucracies (including the courts, the police, and the military)?

Do the powerful and influential in these institutionally structured organizations see their primary function as enriching themselves, their families, and their own insider-group --- usually intricate client-patron networks, but often with those networks in much of the developing countries further demarcated by tribal, ethnic, religious, or racial criteria. Or is their behavior more transparent so they're held accountable --- say, by quick punishment of corruption and bribery --- for not performing their decision-making roles as specified by formal rules: constitutions, laws, government regulations, or professional criteria?

 

(v.) These moral codes, social norms, and collectively held beliefs and expectations are transmitted across the generations by socialization processes, and --- as our examples indicate --- they vary markedly across countries. For that matter, depending on how fragmented the country is into ethnic, tribal, or racial groups, they may vary markedly within a country too. Whatever the case, it is largely these internalized mental phenomena that serve as actual guidelines to ways people will behave in formal institutional organizations.

The pivotal point about them here?

We've already hinted at it. In a word, the gap between what formal institutional rules stipulate --- say, politicians, bureaucrats, judges, and policemen ought not to take bribes --- and the actual degree of corrupt behavior on their part can be huge.

The reality? A huge underground economy --- owing to rampant corruption, tax evasion, and other forms of criminal behavior --- exists almost everywhere in the developing world. In countries like Nigeria or Saudi Arabia, it can be most of the official GDP of the country. In Mexico and Brazil --- regarded as middle-income countries that now have formal democratic systems --- it can be as high as 50% of the official GDP. That's probably also the case of Russia. A few developing countries, it's worth noting, do better on these scores: Singapore in Asia, for instance, or Chile in Latin America. Not surprisingly, their economies flourish all the more compared to their neighbors'.

Observe in passing that the dysfunctional behavior that underlies the underground economy isn't necessarily confined to just the corrupt elites. Most likely, they're the biggest beneficiaries. Anybody who knows, say, Latin America well also knows that almost everywhere tax-evasion is considered a national sport. Then, too, the more corrupt elites in all the institutional spheres of any national society happen to be, the more likely the masses of the population will be cynical and regard tax-evasion and petty forms of criminality as justified. At the extreme, anyone in the country who follows the law other than out of fear is regarded as a naive sucker . . . fair game for everyone else.

 

(vi.) Social norms can and do change now and then, generally when the incentive-structures that individuals and groups within a country change markedly . . . but only with large time-lags. Like all aspects of internalized cultural phenomena --- including basic beliefs about the world and human-nature --- they can't change quickly. If someone claims they do, they're not likely to be more than superficial attitudes or hypocritically affirmed norms and values.

What might be the sorts of marked changes in incentive-structures that --- if sustained long enough --- could actually alter or even transform dominant social norms? Possibly strongly enforced law against corruption in political and bureaucratic circles, including well publicized cases of punishment. The trouble here is, how will you get honest police, prosecutors, and judges to enforce the law?

And note additionally: not all changes in social norms will be for the better, even if they do occur. A good case . . .

 

In point is what has happened to the internalized normative commitments to a hard-work ethos in the Protestant welfare-states of Northern Europe --- in Scandinavia, Germany, and Holland; and the same is true to what has happened to internalized prohibitions against cheating on taxes and welfare benefits.

The populations of those countries were once legendary for their diligence and hard-work and an ingrained reluctance to cheat on either taxes or reliance on welfare. After several decades of increased benefits and taxes, however, the incentive-systems that Swedes or Danes or Finns or Dutch or Germans faced had shifted so markedly that, eventually, a huge underground economy grew up --- twice the size of the US's as a percentage of GDP, according to the best comparative studies; the work-ethos and diligence on-the-job have not only altered in favor of a vacation-ethos, but seem to have collapsed in much of Germany (to single it out), to the point that not one German luxury car now figures in the top 10 vehicles in J.D. Powers' survey of consumer satisfaction --- they all either Japanese or American; the extension of paid sick-leave everywhere in Northern Europe during the 1970s and 1980s led to widespread abuse in the decades that followed; and welfare-cheating is notorious in parts of all these countries that once prided themselves on their civic discipline.

The best studies of how changed incentive-systems have eroded once desirable social norms in the advanced welfare-states in Europe have been published by Assar Lindbeck, a gifted Swedish economist, often with Dennis Snower (a well-known and talented British economist. See for instance the easy-to-read article --- despite some technical jargon --- that Lindbeck published in May 2003 called An Essay on Welfare Dynamics



 

Note that highly undesirable changes in praiseworthy social norms haven't been confined to the advanced state-capitalist countries in the EU. Similar problems and abuses have occurred in this country too (or in Britain), where welfare-benefits are means-tested as opposed to the universal benefits systems in Europe.

Take the Great Society programs, introduced in the Lyndon Johnson era of the mid-1960s, of aid to families with dependent children. Within a decade or so, the shifts in incentive-systems were particularly destructive to the two parent black family. As late as the early-1950s, the percentage of African-American families that were headed by a mother and father were virtually indistinguishable from white families: roughly 89% for each. By the early 1990s, that percentage had collapsed for black families: 70% of African-American children at the start of the decade were born to mothers with no husband. The best study of these changes --- carried out in 1996 by a team of sociologists, economists, and social psychologists appointed by the National Academy of Scientists --- found that for every 10% increase in welfare benefits over the previous decades, illegitimacy rose 11%!

Nor is that all. Despite what New Left radical sociologists and feminist scholars had claimed in the 1970s and 1980s, the huge social problems that ensued in black inner city areas --- surging violent crime, violence committed by ever younger kids, gang-banging, the celebration of Rap-gangsterism, poor performance in school, and extensive drug-use --- had nothing to do with insufficient money . . . a claim that amounted to demanding more welfare-assistance, not less. By the mid-1990s, new research by less ideologically inclined scholars had found a strong correlation between single-parent families and various psychological and social problems of the children reared in them . . . including recourse to crime. That correlation holds at all income levels. Thus in very affluent families --- say, at the $200,000 a year level --- children reared from early age on in one-parent, mother-headed families will be more inclined to these problems than children reared in intact two-parent families.

Is it any wonder that in 1996, President Clinton joined both Democrats and Republicans in Congress to drastically overhaul our welfare-system . . . a move, needless to say, that was condemned by the Academic Left as catastrophic to black families and others? None of the left's horror-story predictions materialized. Far from it, the overhaul proved a remarkable success in reducing welfare-rolls by a half and getting those who left them decent jobs. What's more, by the end of the decade, the official poverty level in the US had dropped to 11%, an all-time low. Almost all specialists, note swiftly, would reduce that rate by about a third to take into account such non-cash benefits as food-stamps, rent subsidies, and medicaid.



 

Two More Examples



A couple of added examples that bear further on the economic and political performances of countries might prove illuminating here.

*Start with the institutionalized legal system of a country.

Any legal system's formal institutional rules --- general and specific --- find expression these days in concrete organizations like legislatures, the courts, the police, prosecutors, professionally certified lawyers, juries, prisons, and law schools, each with their own specialized roles and formal, spelled-out codes of behavior: whether, for instance, in the case of the police, habeas corpus applies to indicted criminals, or what the rights of suspected criminals are in interrogations, and so on. Similarly, each of these organizations within the legal system has formal mechanisms of enforcement: imprisonment for criminals found guilty or who plea-bargain, or police boards that review the police's interrogation methods and punish violators of formal guidelines that regulate the police use of firearms (including dismissal in extreme cases), or higher courts that review the decisions of lower courts . . . in the US all the way up to the Supreme Court.

Enter now informal rules --- socio-cultural influences --- as they influence the legal system.

These socio-cultural influences, remember, refer to the internalized moral norms, shared social norms and conventions, and a variety of core beliefs and expectations about human nature and the social world that actually guide or determine the concrete of individual judges, lawyers, prosecutors, jurors, the police, prison-guards, and potential witnesses. Recall, too, our crux point about their behavioral influence: there can be a huge gap in any country between what formal rules and enforcement mechanisms stipulate in any institutional system --- almost always spelled out in explicit written codes of behavior --- and how those holding roles in specific organizations within that system.

All legal codes, for instance, prohibit judges from taking bribes. The same is true of prosecutors and legislators and the police. Doing so is itself punishable criminal behavior. There doesn't seem to be a country in the world, even dictatorial ones, where publicly all this isn't the case. The reality though?

In a good 2/3 of the world's countries, corruption is a way of life in the political, administrative, and legal systems . . . so much so that even if a judge (or a top civil servant or high-level politician) seeks early on in his career to conform to formal codes and rules and avoid corruption, he's likely to be considered naïve and unreliable and be frozen at a low level or elbowed out of the profession.

  Is there a moral here? Yes, at least two.

I) As the earlier example about the erosion of laudable social norms in Northern Europe, it's likely to be far easier for good social norms to lose behavioral force when incentive-systems change markedly than it is to alter bad social norms for the good --- beliefs and values, say, about the point of holding power in most of the developing countries of the world, especially when they have been anchored in people's behavior for centuries and even millennia.

2) Those who now advocate stepping up enormously foreign aid to Africa without clear, workable formulas for altering the norms and behavior of power-holders in African countries will very likely end up pouring money down drains. Weirdly, the scholar who has emerged as the most prominent of the aid-advocates, Jeffrey Sachs of Columbia, bungled in the same way when he emerged back in the early 1990s as the guru-economist of the Big-Bang transformation of Russia. He advocated changes in formal institutions and policies without in the least taking into account the pervasive kleptocracy --- a continuation of Communist rule for 73 years --- that characterized the Russian political, bureaucratic, and economic systems.

Good institutions, good policies, and above all good social norms are crucial foundations of sustained economic development. High levels of such development require, as we noted earlier, solid democracy and a vigorous civic society. Everything else is a form of band-aids, most of which will be wasted anyway.

(A little sidebar note here: you should ignore too the pleas for the US to step up considerably its formal foreign aid, on the ground that it is the lowest percentage of GDP among the industrial countries --- less than .20%. Let the rock-stars drumming up enthusiasm for it spend a lot of volunteer time working in the field in various African countries. They're likely to do more good, particularly if they get down on their hands-and-knees and work aside struggling peasant farmers, than what they're clamoring for publicly.

For one thing, the figure for more US foreign aid totally ignores private charitable contributions that increase the percentage of GDP going to foreign countries to .68%. For another thing, it ignores the fact that the US --- even at .20% of GDP in government aid --- still is the largest foreign aid donor in the industrial world. For a third thing, it ignores the huge private investment flows to Asia and Latin America, where they can clearly do something to boost long-term economic growth in those countries. The evidence here is overwhelming. And as a fourth and more important thing, not only is there no hard evidence that more foreign aid has ever stepped up the long-term rates of GDP and per capita income growth in any developing country, there are increasing studies --- two just put out by the IMF --- that show why it is likely to impede these rates. Charitable aid, directed by voluntary groups, is another matter; and so are certain limited, carefully defined foreign-aid projects for improving health in certain localities that, in turn, are carefully monitored by foreign observers.

If you want a couple of examples to keep in mind, think of the American-administered aid to both Taiwan and South Korea in the 1950s and early 1960s --- one of which projects, by the way, had been administered by a professor of prof bug when he was in graduate school.

Partly because of the high-levels of education and technical skills in those two countries, partly too because of their ethnic cohesion --- but above all because both countries were utterly dependent for their national security in dealing with Communist threats on the US --- the American-administered aid was able to be conditioned on extensive, far-reaching institutional changes . . . including efficient land-distribution systems, the construction of irrigation and other infrastructure to support agriculture, and credit facilities supported by the South Korean and Taiwanese governments to lend money to productive but small farmers. Cooperatives to share small tractors and other machines were also set up by the American teams. The results paid off handsomely in tremendous surges in their agriculural productivity, reinforced by similar changes in health-system institutions and policies for the urban and large peasant populations)

 



*Consider now a second example: Levels of Trust and Mistrust Across Countries

Historically, societies different markedly in the degree of trust and mistrust that prevail in two related ways: 1) across and between easily recognized groups within any national society, and more generally, 2) between the masses of a population and the key power-holders in the political and economic systems.

To save time, let's just say categorically that the groups in question could be ethnic or racial, or tribal or large family-clans, or social classes. Historically, the Latin and German-speaking countries as they industrialized in the 19th and early 20th centuries were rife with class-conflicts and high-coiled mistrust, suspicion, and fear across class-lines . . . reflected in the existence by the 1920s of large Communist parties as well as radical Socialist ones on the left (in Spain, anarchic-syndicalism as well) and, on the right, militant reactionary political parties that later joined with Fascist and Nazi parties to install dictatorial regimes. Since 1945, that's all changed; but in most of Latin America and all over the Arab Middle East and Africa, suspicion, mistrust, and fear of "the others" are rampant: whether these others are those organized into different religious; or display different ethnicity, tribal affiliation, or racial heritage; or the rich, the affluent, the working classes, and the very poor.

That said, shift your attention now to look at the extent to which trust and mistrust between the powerful and the masses varied across industrial countries in the 19th and early 20th century --- with the English-speaking countries, all fairly early stable democracies, easily distinguished on this score from almost all of West Europe except for tiny Holland, tinier Switzerland, and the small Scandinavian countries. (Except for Switzerland, they are all constitutional monarchies that also moved early toward stable democracy.)

 

The Latter Points Clarified: Different Historical Levels of Trust and Mistrust in The Industrial Countries

Begin with the English-speaking peoples, the Scandinavians, the Swiss, and the Dutch. They have traditionally trusted their political and business leaders, despite some growing skepticism evident in public opinion polls in all their countries the last several years. Similarly, corruption was and has been frowned on in these countries; and business, political, and bureaucratic leaders who engage in it are expected to be quickly punished, as they usually are. Even powerful president in the US who violate these expectations and formal constitutional norms can be driven from office like Nixon or face impeachment like Clinton.

Not so, as we mentioned two or three paragraphs earlier, in the Latin and German-Speaking Countries in the EU.

Far different beliefs and internalized norms and expectations have historically prevailed in these parts of Europe; and they not only have persisted in muted form since 1945, but --- in the turbulent economic and political circumstances of the last few years as GDP growth has slowed down, unemployment leapt, violent crime become rampant, and social strife and mistrust between immigrant Muslim populations and native populations mounted --- these traditional beliefs, norms, and expectations have surged out into the open one more in public opinion and behavior. Witness the growing mistrust of elites in these countries, along with widespread disgust with mainstream politicians, bursting ideological polarization between the parties in power and those in opposition, and new mass movements on the populist far-right that are explicitly racist and extremist.

All this, let's assume, is fairly clear by now. No need then to say anything more about institutions, formal or informal . . . political, economic, or socio-cultural; at any rate, not here.

 

ADD TWO SUPPLEMENTAL THRUSTS TO OUR ORIGINAL INSTITUTIONAL ANALYSIS

What does need to be said is something else: two other analytical thrusts help deepen the explanatory impact in this buggy series on why the market-oriented English-speaking countries have clearly outperformed the state-capitalist countries of Japan or in West Europe on key economic criteria: the growth of GDP and per capita income, and the growth of new jobs while holding down long-term unemployment rates.

The first of these added analytical thrusts is already familiar to you: the use of Schumpeterian insights into long-term economic growth in order to explain these markedly diverse economic outcomes of state-capitalist and market-oriented countries. . What follows in the next sub-section is a brief summary of those insights for our buggy purposes, plus some particularly relevant evidence by way of illustration. It won't take us long to deal with this task.

The other analytical thrust is new. It's the use starting today of public choice theory --- part-and-parcel of modern micro-economics. Meaning? For the time being, it's enough to note the theory's key postulate: political behavior is, at bottom, motivated the same way economic behavior is --- by individual self-interest, rationally pursued. Businessmen and politicians are essentially the same in motive-power and objectives. What alone distinguishes them, according to public choice, are the criteria of success in the two realms: income and wealth in the business world; power, influence, and prestige in the political realm..

 

(i) A Schumpeterian Analysis Prompts Us, First Off, To Look Carefully . . .

At these radically restructuring changes unleashed in global capitalism the last two or three decades: revolutionary technologies, dislocating, rapid-fire globalization, and the related rise of new dynamic industrial countries in Asia. These three combined forces o change should be thoroughly familiar to you by now. Note quickly, though, that there's another disruptive change at work in Japan and all over West Europe that they haven't coped with effectively yet either: the rapid aging of their populations, whose swelling numbers of retirees will have to be supported by the taxes on ever shrinking work forces . . . the latter a direct outcome of birth-rates in these countries far below the replacement rate of 2.1 children per woman. The trend here is a form of what Mark Steyn, the hilarious, hard-hitting Canadian writer who lives in New Hampshire, calls deathbed-demographics.

The following chart brings out the sharply deteriorating nature of the current trends projected into the near future:

Number of Employees For Each Retiree in Selected Countries 2000 and 2030

Source: Taken directly from Dr. Martin Baily, "Policy Briefing: Transforming the European Economy" (June 21, 2004). If you have trouble finding the article at this source, run a google search.

The relevance of grasping the collective import of these monumental changes is best understood in Schumpeterian terms.

In particular, as you might remember, Joseph Schumpeter was the great Harvard economist of Austrian origins in the 1930s and 1940s whose insights into the dynamic, ever-changing nature of capitalist economies --- never really in equilibrium, as mainstream neo-classical theory assumes (and hence is able to apply marginal analysis and look at changes in incremental cost-benefit manner) --- have never been equaled. He and his small band of followers --- the latter led by Richard Nelson of Columbia, who have together helped illuminate the nature of different systems of national innovation across capitalist countries --- have increasingly won attention from mainstream growth-theorists of late, thanks mainly to their focus on long-term waves of radically restructuring technological and other changes in capitalism that these monumental changes have forced upon them. That focus stresses

• The need to probe and fully grasp the nature of the dynamic changes unleashed by long-term waves of revolutionary technologies and all the dislocating economic and possibly political upheavals they cause to the status quo both within countries and on the global scene. Those waves have erupted over the economic landscape every fifty to sixty years since the start of the industrial revolution of the late 18h century. Their economic and political fall-out can last for decades.

• The need to focus on the institutional structures of capitalist countries in order to figure out why some of them cope effectively with these radical changes and others don't. The key concept here, worked out by Nelson and his followers, is that there are different systems of national innovation --- institutional arrangements and governmental policies --- that differ across countries. Some systems are flexible and adapt quickly to change, however dislocating. Others are rigid and resist.

In buggy analytical terms, these two Schumpeterian insights help us understand the very different economic performance of the state-capitalist countries of Japan and West Europe as opposed to the English-speaking market-oriented countries. In case you've forgotten the clear contrasts in their performance the last two decades or so, run your eye again over the tables and charts found at the end of Part One here.

Observe another thing quickly. There's a third Schumpeterian insight that is particularly useful in supplementing our understanding of these systematic differences in the economic performance of the industrial countries:

 

The Failure To Let The Forces of Creative Destruction Play Out In State-Capitalisms

By now, it's obvious to everyone --- even, it finally seems, the governments in Japan and West Europe: none of the state-capitalist countries has effectively adapted their economies to these powerful, fast-moving changes.



Take Japan first. Now in its 14th year of its economic stagnation, the Japanese government --- presiding over the second worse economic record in the industrial world since the Great Depression --- has carried out a few relatively minor structural and policy changes that have corrected some of the piled-up stacks, as high as a mountain chain, of pervasive market-inefficiencies in its national economy. The worse economic record? Enter Germany center-stage. An equally slow growing country, it has the worse unemployment record of all the major industrial countries . . . currently 12.0%, a level the US hasn't experienced since the 1930s. Only this year has a government there tried to get serious about some labor-market reforms, starting with unemployment insurance. The predictable outcome? A nosedive in public opinion and German state-elections. (One qualification: the big German export-oriented firms have recently carried out on their own some impressive cost-cutting and regained much of their competitiveness in international markets they had lost the last several years. Essentially, to put this bluntly, the German economy these days resembles more and more the Japanese economy: a few elite, export-oriented firms have restructured and are highly competitive, but the rest of the national economy is backward, sluggish, tenaciously resistant to change, manned by people who lack inclinations to any risk-taking (entrepreneurial or otherwise), and pulling down national economic growth and new job-creation in alarming ways.)

The same situation characterizes France and Italy and Spain (despite some market reforms that the former conservative government, forced out of office in March 2004, carried out.)

What else?

Well, two or three smaller EU Continental countries --- notably Sweden, Holland, and Denmark have carried out some welcome reforms of their labor markets and generally reduced unemployment to laudable levels (Austria too, come to think of it) --- but that's it; and even these four countries have had an abysmal growth rate in GDP the last four years, roughly averaging 1.0% annually among them. No surprise for us by now. The dominant political logic in state-capitalist countries blocks the ability and willingness of the political and economic elites in Japan and West Europe to adapt their economies and societies to these changes. By contrast, the English-speaking countries shift most of the decision-making for dealing with these changes to non-governmental actors in the economy that rely largely on market incentives and flexibility.

What are the underlying causes of these failures in state-capitalist countries? Here again, a Schumpeterian analysis proves useful: specifically . . .

 

Enter Schumpeterian Gales of Creative Destruction and Resistance to Them

Tersely put, the tightly organized economies and political systems in the state-capitalist countries are structured to block the gales of creative destruction, the primary pre-condition of effective economic adaptation and reform in an era of high-coiled flux and turbulence. It's a self-defeating impasse. The longer their governments delay sweeping changes, the more likely they'll be left behind in global economic competition and find future reforms all the more painful and costly. Unfortunately, the EU and Japanese governments haven't generated enough support within their populations for such change . . . with the EU left-wing governments reluctant to push for it anyway for ideological reasons.

At a minimum, a tough, reform-minded government needs the support not just of a clear majority of the electorate, it would also have to work out understandings with powerful trade unions --- both in the public and private sectors --- to go along with radical reforms of both labor-markets and product-markets. Right now, nowhere in the EU is there any evidence of such cooperation with organized labor. Without it, even reforms supported by a majority of the electorate --- or in public opinion surveys --- could be frustrated by strikes, protests, and even social strife and violence in the German-speaking and Latin countries.

Is this an exaggeration?

Hardly . . . not at a time of such flux and growing social conflict all over the EU.

 

Pause a Moment and Mull Over The Causes At Work Here

The causes of the rapidly spreading social flux and conflict are visible in every EU country, even though the degree of strife itself does vary . . . above all, growing Muslim fundamentalism and backlashes against it, surging violent crime that mainstream political parties have done little to confront effectively, rising unemployment except in a handful of tiny EU countries, and clear signs of new ideological polarization. The latter shows up especially on the far right. The breakthroughs in recent years of right-wing populist parties --- some extremist and racist like Haider's Freedom Party in Austria, Le Pen's National Front in France, and Belgium's VB --- have surprised all the mainstream parties, just as the populist backlashes more recently against the EU Constitution did so in France and Holland.

Their surprise is hard to understand, let alone sympathize with.

At bottom, these populist breakthroughs on the right reflect the growing frustrations in most of the EU countries with the failures of mainstream parties, whether on the left or right, to do anything effective about these social and economic problems. The longer these problems fester, the more frustrations and backlashes are bound to continue. Not only that. The greater the populist backlashes, the harder it will be for tough, determined governments --- assuming any come to power on the EU Continent --- to push through a program of sweeping economic reforms that are bound to cause widespread pain and rippling dislocations of the status-quo everywhere. In such circumstances, after all, the new right-wing parties --- with their built-in demagogic tendencies --- will likely be the big beneficiaries

 

So Where Are We?

It should, let us hope, be pretty evident. Thanks to certain Schumpeterian insights and some buggy twists in applying them, each of you should be fully aware now of the main reasons why the state-capitalist countries in not just the EU and Japan have faltered so badly in key economic performance the last several years --- in the German and Japanese case, for a decade and a half now. In particular, we've seen how

• Capitalism is inherently dynamic, subject to long-waves of abrupt, dislocating changes causes by revolutionary technologies. The economic fall-out --- for that matter, social and political --- will last for decades.

• This fall-out unleashes powerful changes within capitalist countries and on the global scene, challenging the existing status-quo everywhere. Radical restructuring of that status quo is inevitable if economic vigor and competitiveness is to be maintained, especially among rich industrial countries with high wages.

• Only those industrial countries with effective systems of national innovation will come fairly quickly to terms with the gales of creative destruction --- the Schumpeterian term for those challenges to the dominant status quo.

• The market-oriented countries of the English-speaking world have, for the most part, coped successfully with these dislocating gales --- not that they're over; far from it. So far, by contrast, the record of the state-capitalist countries of Japan and the EU is one of general failure . . . with only Sweden, Denmark, and Austria managing to make progress in holding back unemployment rates below 5.0% since 2000, while Holland has kept it between 6.0 – 7.0% this decade. Even, then, these four countries --- their total population 37 million --- have averaged only about 1.5% GDP growth annually since the end of the US-led boom at the start of 2001.

• If the market-oriented systems of national innovation handle radical change more successfully, it's because their economies are dominated by the logic of market incentives and flexibility . . . including the ability to generate lots of vigorous entrepreneurial innovation. The economies of state-capitalist countries, by contrast --- throttled by state-regulations, tax systems, and welfare-payments that throw out of whack market incentives to adapt to radical change --- are dominated by political logic and hence political calculations and maneuverings on the part of not just politicians and parties, but also powerfully organized vested interests that defend the existing status quo.

 

The Fall-Out in the EU and Japan That Has Ensued

It too should be pretty evident, especially for the EU.

All over West Europe, to repeat an earlier point, the mainstream parties in the state-capitalist countries have complicated the prospects of effective institutional and policy reforms by letting other problems --- socially rooted, such as violent crime, rising ethnic tensions, and a widening sense of worry and anxiety about the future captured in public opinion surveys all over the Continent --- build-up and fester, to the benefit of right-wing populist parties. The mainstream parties' recent failure to push through the new, technocratically conceived EU constitution has been a further set-back for them.

Both on the left and right, they apparently hoped that somehow the new constitution would --- by shifting more decision-making power to EU regional institutions --- shift the burden of major economic reform away from their own national governments and deflect the inevitable strife and backlashes against such reform by denying their ability to stop it. The fact that pivotal decisions would be made in the Council of Ministers by qualified majority vote --- enshrouded in secrecy --- was no doubt doubly appealing to Socialist and Conservative mainstream party leaders.

As for Japan, social conflict and strife aren't on the agenda --- violent crime isn't as bad as in the EU, there are no Muslim minorities, trade unions aren't powerful except in parts of the public sector, and national cohesion is more intact than in Europe --- and neither is there much prospect of any breakthrough by radical political parties on either the left or right. For that matter, there is not much more likelihood that even a relatively united, effective political Opposition party or coalition will materialize. Instead, the most rapidly aging population in the industrial world is likely to continue acquiescing in slow economic growth and limited institutional and policy reforms carried out in hesitant manner by the Liberal Democratic Party government of the day . . . the party stalwarts interested above all in winning the next national elections, which means not upsetting the electorate with bold changes.

 

(ii) Enter Public Choice Theory As An Added Explanatory Thrust

Its First Major Premise: The Motive-Forces of Political Behavior

The baseline assumption in public choice theory --- which applies economic analysis and assumptions to the political realm (one of its two great pioneers, James Buchanan, won a Nobel prize in the late 1980s for his path-breaking work) --- is that human behavior is rational and motivated by self-interest whatever the institutional realm or setting. Rational here, to simplify, means purposeful action: any person pursuing a goal where there are alternatives for achieving it will, on balance --- subject to the information available --- is motivated to select the alternative that seems most likely to bring success. The goal in question aims at enhancing self-interest, however the person defines it.

This is something self-evident in economic life. What public choice theory does is assume that politicians and bureaucrats behave just as businessmen do, only in the political realm. Their motives are seen as being the same; their ability to understand their self-interests and to pursue choices that enhance them is the same; and what alone differs is the measure of success: not income and wealth, but rather power, prestige, and influence.

Translated into more concrete terms, what this means is that politicians --- whatever else their other goals might be --- are primarily interested in election or re-election, at any rate in democratic countries. Even if they have ideological aims in mind once they get power, getting or retaining it is their primary motive-force. As for bureaucrats, the heads of agencies and everyone else in the hierarchy is assumed to be pursuing self-interested goals too, which means advancing their careers and hence salaries, prestige, and power within the hierarchy. At or near the top of any agency, the chief bureaucrats find, as a general thing, that the best way to advance their careers or their --- which means, in their case, expanding their agencies' tasks and budgets, the major way of advancing their prestige and power is to expand the agency's tasks and budgets each year.

 

Note that the rational pursuit of self-interested political goals doesn't stop with politicians and bureaucrats in public-choice theory.

It's extended to include the professional staffs in political parties; voters in all elections; and the heads and staffs and active members in interest groups seeking to use political influence to enhance their own ends. A classic example of such a self-interested interest group would be a powerful political lobby created by the owners, managers, and employees in an industry --- say, textiles --- that is increasingly losing profits and market-share to foreign imports. Instead of trying to become more productive to stave off this threat --- or, alternatively, having tried but failed to do so --- the self-interested owners, managers, and employees will likely find it more profitable to try winning tariff protection by the use of campaign money, PR-propaganda in the media, and promised votes for local or national politicians who support them . . . and, simultaneously of course, threatening to punish politicians who don't support them.

Given how useful this theory can be in analyzing politicized behavior --- provided it's used with care --- we'll devote an entire fourth part of this article to a lengthy example: the insider-outsider model of labor-markets in the state-capitalist countries. It explains better than anything why unemployment rates --- cyclical and long-term alike --- have continued to grow by leaps-and-bounds in West Europe since the mid-1970s.

In effect, as you'll see, the insiders are workers in both the public and private sectors who have increased their job-security and income by lobbying and voting for parties and legislators who promise to heavily regulate labor markets to their advantage . . . at the expense of the young seeking initial employment, those laid-off in certain industries losing government support, and minorities. Examples of such regulations and other interventions: high-minimum wages that make it hard for businesses to hire young workers or other outsiders with limited skills; high social security taxes that make it doubly costly for businesses to hire them; regulatory limits on the ability to lay-off workers even in a recession; and --- in most of the EU --- regulations that require employers to pay large compensation-fees for workers they have to let go who have a certain seniority within their business firms.

 

Its Second Major Premise:
The Pursuit of Self-Interest in the Political System Is Likely To Be Harmful and Even At Times Catastrophic

Pubic choice theory --- which is widely applied these days in modern economics and political science alike, especially when it comes to modeling individual behavior --- argues that there is one big difference in the efficiency of decision-making between the two institutional realms.

In the market economy, competition is supposed to prevail, and so there are self-correcting mechanisms with fairly quick feedback to bad or erratic decision-making, especially by business firms. In politics, once governments are elected, such competitive limits with quick feedback are absent. Politics is the realm of authoritative decision-making. Governments have a monopoly of power to pursue various policies. Yes, in democratic countries, that monopoly is subject to constitutional limits, but within those limits there aren't self-corrective mechanisms of the sort found in competitive markets.

The result is various degrees of economic harm and at times disaster . . . or, in economic jargon, government-failures: the equivalent in politics of market-failures, only worse.

 

To grasp this key point, consider decision-making in the private sector.

If American consumers don't like the decisions and products of Ford and GM, they can refuse to buy their vehicles and opt instead --- as they have with increasing intensity for the last 20 years --- for Japanese vehicles. Ford and GM either find ways to emulate or best the competition from Japan, or they will suffer: market-share, profits, their bond rating, the willingness of people to buy their equity shares, and so on. Ultimately, they will --- if they don't effectively restructure and adapt --- go broke.

 

Not So in the Political Realm

The role of state authority creates a monopoly nature of politics in key political decision-making, even if the power-holders in democratic countries have to compete at election time. Once the elections are over, politicians --- whether in government or in opposition parties --- then focus on winning the next election. That means that, save for exceptional political leaders and circumstances --- usually involving national crises (at home or abroad) --- they will do what they can to appease powerful interest groups and the majority of the electorate. Suppose then that you are a Democrat, and you don't like the Bush tax cuts instituted after 2001. You can't tell the IRS that you aren't going to pay your taxes to them subsequently, preferring instead to use the Swedish or the Japanese tax system.

The same is true across-the-board in political life.

The problems of correcting bad decisions --- or even identifying why they are bad --- aren't confined to monopoly conditions in which self-interested politicians operate as political entrepreneurs chasing votes. Far from it, they extend to deficiencies in information in politics compared to economic decisions, and to the aggregate nature of political party platforms or governmental policies in a dozen different areas --- some parts of which might attract voters, but other parts might not (with voters unable to disaggregate the platform promises and vote selectively in favor of this policy but not that one --- and to the varying incentives of different citizens to get good information as to how their interests are affected by various governmental policies and hence organize collectively into groups to promote or protect them.

The latter is a question of which groups can organize easily or not for collective political action. Why, for instance, do the firms and trade unions in an industry threatened by foreign competition manage to organize and lobby Congressmen and members of the executive, even if only a few thousand jobs are at stake; but tens of millions of consumers whose interests will be hurt by tariffs or quotas erected to protect the threatened industry find it almost impossible to and organize to protect their interests if harmed?

Nor is that all.

 

Consider Five More Brief Examples

All five, according to public-choice theory, illustrate the large problems of efficient political decision-making compared to economic ones in competitive markets.

(i.) The first is informational, which can separate voters from consumers even in the same family household.

As consumers, the family members can focus carefully on how to spend their own money when it comes to buying a car: they'll talk to friends, consult Consumer Reports, go visit various car dealers, and know they are making a critical decision. The same family members as voters --- half Republican, half Democrats in recent US presidential elections --- don't have the same incentives to spend time, gain good information, and vote with full confidence they can control the outcome of the election the way they can when they buy a Toyota or a Ford.

(ii.) The second problem is the nature of political decisions.

Voters, as we noted a moment or two ago, can't disaggregate their preferences when deciding whether to vote for President Bush or John Kerry in a presidential election. Even if they take the time to be well informed about the past performance of the two candidates, they faced a problem that consumers don't: the family-members we've been discussing might like some things about Bush's foreign policy, dislike many things about his environmental policies, and have mixed views about his economic policies . . . quite apart from judgments about his character as president compared to John Kerry's or Al Gore's. How do they make fully informed, rational decisions then? (Party affiliation is a fairly crude guide here, never mind if the family members happen to be non-partisan and vote Republican sometimes and Democratic other times.)

(iii.) The third problem is that politicians in power --- primarily interested in re-election --- have a built-in incentive to spend money on programs that will