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Monday, July 4, 2005

IDEOLOGIES AND ECONOMIC PERFORMANCE: 6th Article in a Series

This, the 6th article in a series on the economic performance of the two kinds of economic systems in industrial countries these days --- those that adhere to variants of state-capitalism in Japan and on the EU-15 Continent, and those like the US and the other English-speaking countries that are market-oriented --- is a direct follow-up of the previous article's argument. To be exact, it sets out parts III and IV of that argument . . . the original draft cleaved in two because of its length; that's all, no other reason. Two other parts precede these.

The Four Parts of the Argument Clarified



In part one, some introductory comments unfold that link today's argument to the analysis in the previous article and --- no less important --- place it within the wider ambit of the entire series' thrust and main points. The series began in early May 2005, a good six weeks ago. Even if you've followed its substantive twists and turns in the five earlier installments, these introductory comments should help jog your memory and widen your perspective on what follows here.

In part two, the explanatory thrust in this lengthy buggy series --- now several weeks old --- is set out and clarified in greater depth than in earlier prof bug articles. There are two sides to that thrust. The first side, treated exclusively in this part, is an institutional analysis of the state-capitalist and market-oriented countries: in particular --- with the help of both some Schumpeterian insights into long-term economic growth and what's called public choice theory in economics --- the institutional stress explains why the economic status quo is so tenaciously defended and hard to change in Japan and the EU Continental countries, especially compared to the English-speaking countries.

Part three brings us to the second explanatory thrust in this series --- and for that matter, in the wider, more ambitious series that started last December (2004). As prof bug has repeatedly stressed, there are different ideological heritages in the industrial capitalist countries, and these differences have particularly separated Japan and the Continental West Europeans from the English-speaking --- the US, Britain, Ireland, Australia, New Zealand, and Canada countries --- in key political and economic ways, especially before WWII.

The argument unfolded in part three probes the nature of those differences, their historical causes during the 19th and early 20th centuries, and the reasons why, after 1945, the state-capitalist countries instituted an elaborate regulatory and welfare-state system with high levels of social protection and social spending.

Bluntly put, Japan and the West European countries created and later rapidly expanded that statist-capitalism as the major way to end several decades of acute class-conflict, sharp (if off-and-on) social strife, ideological extremism, and violence --- domestic and external. Along with new democratic institutions in the Latin and German-speaking countries --- to an extent, even in Holland and Scandinavia that had avoided the worst forms of such extremism --- the new state-guided form of capitalism ended the age-old battles between capitalism and socialisms of various sorts and underpinned political moderation for the first time in generations.

That system alone brought them social and political peace. It was essential after 1945, and it remains essential these days too. That pressing social and political need means, in turn, that neither Japan nor the West European Continental countries are likely to emulate the market-oriented institutions and policies of the English-speaking world.

Even in the English-speaking world, as we'll see, only the US with its own unique ideological heritage --- no socialist traditions on the left, no statist ones of even the Tory-sort in the British Conservative Party on the right --- never instituted an intricate, tightly organized form of state-capitalism after 1945. Probably the closest it came to one was in the Lyndon Johnson era of the Great Society. By contrast, Britain, Ireland, Australia, and New Zealand did adopt elaborate, full-tilt regulatory and welfare-state system of high taxes, social protection, and social spending, and they abandoned it only in the 1980s as a huge brake on economic vigor and competitiveness that had trammeled their growth rates in per capita income and job-creation for decades. Those market-oriented reforms brought them much more in line with the US in the Reagan, Bush, and Clinton eras, just as it brought them back to their historical market-oriented roots.

As for Canada, its economy moved in the opposite direction after 1968, as successive Liberal governments --- only briefly not ruling Canada in the mid-late 1980s --- rapidly expanded regulations, taxes, and social programs galore.




In part four, finally, the argument returns to look at public choice theory and show how its axiomatic views of political actors --- whether politicians in government or opposition, bureaucrats, powerful interest groups (not just business and financial and agricultural organized interests, but trade unions), and voters --- help explain the rigidities of labor markets in West European continental countries, showing up in every increase levels of long-term unemployed people there.

Addendum, July 4th: What with the length of parts one, two, and three, prof bug has decided to hold off and publish part four tomorrow --- or the day after, depending on how much more statistical evidence is needed to document the insider-outsider model of the labor-market problems in the state-capitalist countries of the EU.

What Follows in the Next Buggy Article or Two

Just as today's article is a direct follow-up of the previous one in the ongoing buggy series on ideologies, institutions, and economic performance, so the next article in the series (the 6th) --- virtually done, by the way --- will pursue the themes introduced in both article 4 and 5. Two parts will unfold, with perhaps a third not yet in existence beyond a few flutters of buggy brainwaves:

One part will deepen our analysis of the theoretical insights into long-term economic growth that Joseph Schumpeter originally developed in the 1930s and 1940s at Harvard and that his small band of followers added to and deepened ever since. Remember, this part and the following are direct follow-ups of the argument set out in the previous buggy article.

The second part will apply a pivotal Schumpeterian concept --- the gales of creative destruction --- to help illuminate the reasons why the state-capitalist countries have had so much trouble in altering their economic status quo and coming to terms with the rippling changes underway in global capitalism. Inversely, the analysis in this part clarifies why the market-oriented countries of the English-speaking world have had far greater success on these scores.


Part One:
INTRODUCTORY COMMENTS


(1) The Two Systems of Industrial Capitalism

Now several weeks old, the buggy series, remember, seeks to explain the markedly diverse economic performance over the last 15 years or so of two kinds of capitalism in the industrial world. Don't worry if you can't recall how we defined economic performance in the previous article: we'll trot out the criteria again in a few seconds here, along with lots of data by way of support. For the time being, focus your minds on the two kinds of capitalism.

 

State-Capitalism

Japan and the EU Continental countries all adhere to variants of state-dominated capitalism: an intricate, tightly organized system of massive regulations of economic markets, high levels of government spending --- or, in the Japanese case, a sustained surge of such spending since the low level until the early 1990s --- extensive welfare transfers, and a dominant role of political decision-making (and political calculations) when it comes to revising economic institutions and key policies within their countries. Any decision that risks changing the existing economic status quo in all but trivial ways immediately evokes high-coiled resistance from a vast array of powerful, well organized vested interests that seek to defend it; and politicians in power not only have to contend with these weighty sectional interests, but with the reactions within their own political parties and above all of public opinion and the electorate.

Note that though the state role in the industrialization of these economies was greater than in Britain and the other English-speaking countries during the 19th and early 20th centuries, it enormously expanded after 1945. It expanded for three related reasons.

  • From the outset, a state-dominated system of capitalism in Japan and on the European Continent was and remains essential to their social peace. That crucial political and social need puts clear limits on how easily the powerfully defended economic status-quo in their countries can be reformed and altered . . . particularly compared to the big market-oriented reforms carried out in the English-speaking countries during the 1980s and 1990s.


  • Simultaneously, ever since the late 1940s, the electorates in West Europe and Japan have wanted that system to expand. They have voted for or supported governments that brought them more social spending, more welfare transfers, and more regulations, and they have continued doing so even in an era of slow economic growth and ever high levels of long-run unemployment.


  • Not least, consensual politics on both the left and right among mainstream political parties --- or in Japan, by means of one-party dominance for over fifty years --- has underpinned the system's expansion for more than fifty years.


What follows is amply clear. As we noted a moment ago, the second a reform-minded government in the last few years of stagnant growth and rising unemployment does more than nibble away at the edges of the existing state-capitalist system's welfare benefits and regulations around labor markets and product markets, it is likely to produce energetic backlashes in public opinion and from powerful sectional interests --- whether unionized labor, non-unionized workers, and business firms of all size. Electorate punishment will likely ensue if the reform schemes persist. Retreats are then inevitable. That's true right now in the big countries on the West European Continent --- whether in Italy, Germany, or France; and it doesn't seem to matter whether the reformers are in left-wing or right-wing parties. It's also true in almost all the small EU-15 countries; and come to that, it's no less evident even in the one-party dominated political system in Japan.

Some economic specialists on the EU and its member-countries, observe quickly, have a different view about the reforms initiated by certain governments like France and Germany in the 1990s. They claim, for instance --- without hard evidence --- that labor market reforms have helped make them far more flexible. As you'll see later, that's only half-true of about three or four small countries --- Austria, Sweden, Denmark, and Holland, though you'll also see that there is lots of hidden unemployment such as government training programs that lead nowhere . . . a policy of merely shifting people on tax-supported unemployment benefits to tax-supported and temporary job-training and then back and forth again. In Sweden, for instance, a recent study by a specialist who worked for Sweden's largest trade union, LO, claimed that if you probed carefully the hidden unemployment in the country's official rate --- now about 5.5% --- you'll find large numbers of Swedes who've been encouraged to retire early on tax-supported social security (and hence shrink the potential labor pool) or stay on prolonged sick-leave even if there is little or no medical evidence they're sick. His conclusion of his 5-year study -- widely discussed in the Swedish media in the spring of 2005 (the author of the study initially kicked out of LO and then reinstated after the media found out) --- is that Sweden's real unemployment rate is more likely as high as 20-25%. Even if it's half that, it shows how various state regulations and benefits make accurate assessments of suppressed unemployment in the EU difficult to probe.

Note that the best study of labor-market reforms in the EU --- very up-to-date moreover, by a French economist with a Ph.D. from MIT --- finds that only one EU country clearly ended up with successful changes in its labor-markets; and that country, as it happens, is Ireland . . . a market-oriented country. Otherwise, there is some ambiguous evidence that Austria might partially be a success too.

What has happened, the French economist finds, is that for every touted reform to make labor markets more flexible in the EU, there has been some offsetting policy such as raising minimum wages or adding another regulation here or there. See Gilles Saint-Paul, "Did European Labor Markets Become More Competitive in the 1990s? Evidence from Estimated Worker Rents"


 

Sidebar Clarification: The statist-capitalism institutionalized in Japan after 1945, as a recent buggy article showed at length with lots of data as back-up evidence, differed traditionally from the EU form of state-capitalism in certain ways . . . at any rate down until the end of the 1980s.

On the one hand --- as the two previous buggy articles in this series showed at length, with extensive data --- the Japanese economy was marked by a system of even more intrusive state regulations, subsidies, and various forms of anti-competitive barriers, including industrial targeting by important governmental bureaucracies. In most respects, it was little more than the mobilized war-economy run by the state in WWII with a few adaptations grafted on after 1945. All this reflected, if anything, an even deeper mistrust of free-market capitalism than found anywhere in West Europe. On the other hand, it adhered to lower taxes, lower government spending, and lower levels of welfare-transfers. Since the start of the 1990s, though, the differences with the EU Continental countries have noticeably muted.

In particular, Japan's government spending began to surge until, at present, it is noticeably higher than the US's; simultaneously, most of the EU Continental countries --- all facing ever slower growth rates in per capita income, even as social spending and welfare commitments remained pressing --- began to trim overall government spending by a few percentage points. Meanwhile, Japan's deficit spending has climbed to unprecedented heights in the industrial world; its cumulative national debt is about three times higher as a percentage of GDP --- around 180% --- than in the EU or the US; and simultaneously, its welfare support has grown rapidly as well. Over the next 20 years, the Japanese population will age faster than any in the industrial world, and more and more retirees will have to be supported by taxes and government payments even as the working population shrinks at a fairly fast pace too.

Nor is that all.

Under incessant pressure to cope with its ongoing economic crisis, Japanese governments have eliminated a few of their more egregious anti-competitive regulations. Don't misunderstand though: the Japanese economy is still highly regulated, but not much more these days than the average EU Continental country. As in the EU, lots of people in Japan favor more economic reforms --- only not at their expense, rather only if it the costs can be shifted to other groups and individuals. Needless to add, despite lots of political rhetoric about the high-powered reforms in the policy pipeline, every LDP government keeps most of them there as soon as public opinion or LDP backbenchers start to turn hostile.

In short, the differences between Japan's and the typical EU country's statist-capitalism have noticeably narrowed the last few years.

And note swiftly. We still haven't mentioned what all these state-capitalist variants have most in common, at any rate as far as their economic performance goes: in both Japan and West Europe, a tightly defended economic status-quo persists even as global capitalism has drastically altered the last few decades --- technologically and otherwise --- and the economic performance of the state-capitalist countries has sputtered and fizzled . . . especially in comparison with the reformed market-oriented countries in the English-speaking world. Agreed: governments in both Japan and West Europe have carried out limited market-oriented reforms the last few years. That's true. Even so, for all the rhetorical huffing and puffing of governments, the core economic problems of the statist-capitalisms --- key institutions and dominant polices that have buried their economies under huge hillocks of piled-up market-inefficiencies --- have hardly been scratched by these reforms.

The only way to unlock the status-quo and revive economic dynamism in all the statist-capitalisms is to deregulate massively, reduce government spending massively, and cut back more than a little of their welfare transfers. That they haven't done, and for political reasons --- the need to preserve social peace and inhibit ideological polarization and the breakthrough of extremist movements and parties on the left and right (already a big problem in France, Germany, Austria, Belgium, and Italy) --- they may not succeed for decades to come.


All these key points, please note, will be elaborated on in Part Three of today's article . . . with lots of concrete examples.

 

Why The English-Speaking Countries Moved in a Market-Oriented Direction After 1980, Returning To Their Earlier Institutional and Ideological Heritages
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

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
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.

Untitled Document
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 na´ve 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 ľ 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 benefit their own likely voters and interest-group constituencies, at the expense of the rest of the population . . . and whatever the long-term harm to the national economy. After all, the money they'll spend isn't theirs; it's raised by taxes on all income-earners. As consumers in a family household, by contrast, the same politicians have to limit their expenditures to what their own income and budgets allow . . . exactly like the rest of us.

(iv.) Enter a closely related fourth problem.

The drawbacks of politicians spending public money to curry the support of campaign donors and voters aren't confined to just partisans uses of public money. Even worse are the short-sighted calculations involved in such vote-getting by political entrepreneurs in power, who will tend to ignore the long-term harm to the national economy. Years down the road, higher taxes might hurt job-creation. The same is true of higher minimum wages and other regulations in the labor-market. From an economic viewpoint, both add up to why the welfare-state has expanded so much in the EU even after 1975, when economic growth and job-creation both noticeably slowed down.

Note quickly though: the problem of short-sighted calculations isn't necessarily confined to governments ambitious welfare-state countries or even on the left in the US. Think of the Bush tax-cuts. Democrats and even some Republicans have attacked the cuts as harming the future productivity of the US economy: specifically, the cuts have led to structural federal deficits by reducing tax revenue --- especially from the rich and affluent (the Republicans' most loyal constituents and voters) --- without reducing government spending on existing programs.

(v.) The fifth problem relates to the nature of majority voting.

Even majority voting can be erratic in politics compared to decisions made by the members of a family who can individually spend their own money --- subject to the family's budgetary limits (including credit) --- in line with how strongly they feel about, say, going on a trip to the mountains or the sea. Assume the family consists of two parents and four children. The mother and three of the children want to go to the seaside. The father and the remaining child opt for the mountains. Will the family spend their vacation-time at the seaside? Not necessarily . . . not if the father and the child feel far more powerfully about not going there and express their pro- and con-sentiments with greater, self-evident intensity. If the four other members of the family who would rather go to the seaside don't sense or manifest the same degree of intense preferences, the minority of two will likely prevail.

A trivial example? Not really, at any rate as far as the logic of decision-making goes.

In a local community, for instance, 51% of the voters might reject an initiative or referendum to increase spending on local schools; but the 49% of the electorate that voted for the measure might all have children in school and believe the spending is needed to improve teacher training and provide tutorial assistance for poorly performing school kids, whereas most of the voters who opposed the measure don't have children of school age and are mildly, but not strongly opposed to the increased taxes they would have to pay if the measure went through. Majority voting is like that. It may or may not record any intensity of preferences, as opposed to how the family-members felt and expressed their feelings when they were considering where to spend their vacation-time this summer.

All these different examples reflect different kinds of government-failures. They could be multiplied several times over.

 

Sidebar Clarifications of Government Failures vs. Market Failures



(i.) Start with the existence of market-failures --- problems caused by self-interested actors in a capitalist economy that prevent a free-market system from achieving full efficiency. In technical terms, the market's outcomes involving owners or managers of business firms, their employees, and consumers might not reach the Pareto frontier of full efficiency. (Pareto was an Italian economist in the early 20th century.) Common examples of such market-failures are pollution, monopolistic tendencies if they occur, inability to provide public goods like a country's common defense, inadequate information about goods like pharmaceuticals or the safety of food that require government regulations and inspection.

(ii.) In theory, it's true, the Coase-theorem (named after Ronald Coase of the University of Chicago, who won a Nobel prize for it in 1991) argues that those harmed by market failures --- say, those suffering air pollution caused by a nearby factory --- could identify their common condition, join together, and bargain freely with the factory owner to offer cash-incentives that would lead the owner to reduce the pollution . . . say, by a variety of costly technical fixes.

Everybody wins from such bargaining between self-interested people. The factory continues to employ locals; the locals suffer less air pollution. The outcome, technically speaking, corrects the externality-problem in free markets that derives from the absence of clearly defined property rights --- in this case, no one owns the air around the factory and in the locality. Social welfare is enhanced; the bargaining between private parties --- the factory owner and the residents in the locality --- corrects the market-failure and moves the economy toward the Pareto-frontier of efficiency.

(iii.) In practice, as even Coase noted in his 1991 Nobel speech, the transaction costs and information problems in such bargaining might be too burdensome to be overcome.

In our example, the local residents would have trouble identifying one another; have trouble deciding how much each family is hurt by the pollution (the costs of which will vary); decide how to choose a representative to bargain for them with the factory owner; and find that the estimated costs of various technical fixes to the factory's pollution require that they meet repeatedly to discuss their common willingness to proceed. Nor is that all. The bargaining might be subject to free-riding problems: if any one of the local residents calculates that the others will fork up the money to pay off the factory owner, then what incentive does he have to contribute his own money if, in the outcome --- without paying anything --- he still benefits from the clean air others have paid for. Knowing this, why then would anyone strictly self-interested and rational contribute? Why not let George do it?

The net effect is that the market failure --- say, pollution in a locality --- will likely persist.

(iv.) In that case, governmental intervention to correct the externality will be needed.

Local or state or federal authorities could set a regulatory limit of pollution for the factory. More cost-beneficial, it's argued, would be for the government to tax the pollution because taxes are adjustable and less costly to impose; or alternatively, for the government to sell polluting permits to the local factory, its national outlets, and other factory firms in the industry that will achieve the same goal --- internalizing the private costs to the factory owner of polluting the free air and leading him to undertake the technical fixes that would reduce the pollution levels so that social welfare is again maximized for the locality. The factory stays in operation; it continues to hire the locals; and the locals experience less air pollution.

(v.) What public choice argues is that such governmental intervention might not improve the market's outcome here --- especially if multiplied by thousands of such cases of air pollution. Instead, because politicians are interested in winning elections, they might be bought off by the factory owners and trade unions in the industry to go easy on the taxes or costs of permits.

This isn't a matter of illegal bribery; rather, an instance of campaign contributions, with a warning that if the politicians in power don't accept the contributions, they will go to the other party's candidates in the next election. By contrast, the local residents in our example --- not to mention those in thousands of other localities --- will have trouble organizing for collective action to represent their own interests compared to the ease with which the factory owners and trade unions in the organization can organize and raise money. That's probably self-evident. The owners and workers in the industry are limited in number and have a great deal at stake if their profits shrink and lay-offs or bankruptcy ensues. It's easy to see their common interest, organize lobbies, offer campaign money, do it on a national basis, and so on. Not so millions of households around the country suffering pollution from the factories in the industry.

Nor is that all.

Since the regulatory agency that is supposed to reduce the pollution is headed by a bureaucrat --- interested in his career, which will be furthered by expanding his agency's budgets and tasks --- he and his subordinates might come up with technical analysis that is far more costly than neutral experts might find. The head bureaucrat, after all, has an incentive to exaggerate the problem, then get rewarded amply for solving it.

(vi.) In technical terms once again, these negative outcomes of governmental intervention are called government failures. Instead of correcting market failures (inefficiencies), they might compound them . . . which is another way of saying, again in technical jargon, that the Pareto-inefficient market equilibrium is worsened, moving the equilibrium further from the Pareto frontier of full efficiency.

(vii). The following chart --- taken directly from a textbook written by Paul Samuelson and William Nordhaus --- aptly illustrates the problems for an economy that are caused by market-failures and possible government-failures that follow from governmental interventions of various kinds . . . including the aim of correcting a market-failure.

In the diagram --- which the two authors explain more clearly in the text surrounding it --- the hypothetical Pareto-frontier of a market economy is represented by the curved line. That lines represents all the points where the maximum efficiency of all economic decision-making is reached, given the existing levels of productivity and with existing national and household income expenditures on tens of thousands of goods and services. At the frontier, any movement along it in any direction I zero-sum: one group --- in the existing diagram the economic welfare of group A's members (all affluent people in the economy, or all consumers, or the employed with job-security, or all Republicans ) --- can be enhanced at the frontier only by hurting the economic welfare of the members in Group B. (They could be all the poor; or certain producer firms; or the jobless seeking work; or all Democrats)

 

In the diagram, the market-economy's workings lead to an equilibrium point (E) that is far short of maximum efficiency along the frontier . . . a clear sign of various market-failures. Samuelson and Nordhaus urge us to think of it being the outcome of a strictly laissez-faire economy, in which the government builds no roads, vaccinates no children, and in fact does nothing to offset the failures. Enter governmental action to deal with them. There are three possible outcomes.

One is an efficient and equitable set of various government policies --- like infrastructure development, public health programs, flexible anti-pollution programs, good public education --- that move the laissez-faire economy to P, much closer to the Pareto frontier. It's not only more efficient, there's been no redistribution of economic welfare between the members of Group A and B. The members of both groups --- which might encompass the entire national population --- are equally better off. Hence there's no government failure.

A second outcome might be for a Republican president and Republican-dominated Congress passing new tax legislation that favor the affluent and most of their voters at the expense of everyone else in group B. The outcome is R, which moves the market-economy's outcome toward R. It is closer than E to the Pareto-frontier's maximum efficiency, but in the process the overall income of B's members falls while that of A's members grows. In the process, a government failure has occurred. (Note: this is a hypothetical example. Bush and Republican Senators and Congressmen may have believed sincerely that the tax cuts will benefit everyone else in the long-run, by increasing savings and investment-levels and hence increasing the future growth of per capita income and jobs. For R to be the long-run outcome, these Republican calculations --- if sincere --- would prove wrong.)

The third outcome --- W --- is an example of government-failures that cause not just harm to the interests of Group B's members, but to everyone's --- that is, disaster..

The Samuleson-Nordhaus example spelled out under the diagram refers to a massive failure like a miscalculation that leads to a nuclear war. Far short of that, think if you want of repeated governmental regulations and governmental spending by the advanced regulatory and welfare-state countries on the EU Continent: over time, their economic vigor has waned; GDP and per capita income are scarcely growing; job-creation has badly suffered; unemployment levels keep rising; and worse yet, their future ability to meet all their welfare-commitments amid shrinking work-forces and surging numbers of pensioners --- all at a time of slow GDP growth and shrinking tax revenue --- is increasingly questionable.

Samuelson-Nordstrom Illustration of the Efficiency if Public Action

Copied Directly From Source: Paul Samuelson and William D. Nordhaus, Economics (McGraw-Hill, 14th ed: 1992), p. 306.



A Relevant Example To Illustrate How Public-Choice Theory Explains The Causes of Rigid Labor Markets in the State Capitalist Countries

No, we won't renege on what we said earlier and delve into the insider-outsider model of labor-market performance here. Instead, the following brief account of how labor-markets in the EU --- which once performed as well as in the US --- became increasingly rigid for other reasons because of the vicious cycles that can be set off, usually with lengthy time-lags, between the politically motivated benefits that governments dish out to powerful and favored constituencies and the long-term costs to the national economy's overall efficiency and growth-rates.

 

A Good Performance For Three Decades, Followed by Slowly Building Disaster

Until the mid-1970s, the average rate of unemployment in the EU countries was about the same as in the US or even slightly lower. So was the percentage of the adult populations actively working. They were roughly the same on both sides of the Atlantic.

Starting in the 1960s and on into the 1970s, however, government regulations of labor-markets and a variety of enhanced welfare-benefits multiplied rapidly on the EU Contiunent. In particular, by the mid-1970s --- just about the moment the annual rate of economic growth was reduced by 50% or so across the EU (reduced by about 67% in Japan and about 33% in the US as high oil prices threw growth rates out of whack in the industrial world) --- the EU state-capitalist countries were locked into a seemingly endless cycle of ever higher minimum wages; ever longer, more bountiful unemployment benefits; ever more job-security laws and regulations; ever higher severance costs to employers who let workers go in recessionary periods; ever more generous sick-leave benefits; and ever higher payroll taxes to pay for all these benefits. Come to that, the range of relative wages became ever more compressed too.

 

The Perverse Results?

They showed up starting in the 1980s and have been manifesting themselves ever since: increasingly rigid labor markets and ever slower rates of job-creation, ever larger numbers of the long-term unemployed, and ever faster boost to those numbers each time a recessionary shock has hit the EU economies ever since. As for ever more generous sick-leave benefits, the outcome was no less perverse if predictable: more and more workers in the EU countries reported sick. What's more, there was a direct correlation with the number of days sick-leave could be taken each year. The larger the number of days, the larger the number of the sick.

Nor is that all.

Simultaneously, the percentage of the adult population in the work force --- until the mid-1970s, roughly the same as in the US (as were EU unemployment rates) --- began shrinking everywhere on the EU Continent . . . perilously so, remember, at a time when the numbers of retirees the active work-force has to support by taxes is rapidly increasingly in Europe (and Japan). Note that some of these retirees might be skilled workers whose talents would fill jobs that those actively in the job-market don't have. Would some of them like to continue working, say part-time? Possibly; but then high marginal taxes on any extra income besides pensions --- often in excess of 50% --- are a big source of discouragement here.

 

A Brief Sidebar Clarification of Unemployment Rates and Levels in the EU State-Capitalist and Market-Oriented Countries

As we've noted before, Sweden, Denmark, and Austria --- all tiny, fairly homogenous EU countries --- have done better, generally, in keeping unemployment rates down. To a lesser extent, so has Holland. But note: that has come at a high price --- more wage flexibility in Denmark, say, compensated for by more unemployment benefits to outsiders in the job market; or in both Denmark and Sweden a large expansion of public-sector employees whose wages have to be paid for in part by ever higher levels of taxation; or in Holland by combinations of these, plus involuntary part-time work for people who would like to work full time.

Elsewhere on the EU Continent, governments of both the left and right have tinkered with this or that regulation --- often in incoherent fashion --- to keep unemployment levels from rising, but without success. In France, back in late April, the right-wing government raised the minimum wage, claiming it would boost consumption. The powerful public-sector unions were delighted. So were the left-wing parties as well. After that government fell in late May, a new right-wing government sought to offset high minimum wages and severance costs to businesses that hire workers by allowing some flexibility on these scores to small businesses. Not only have the unions opposed these timid measures --- which contradicted what the previous right-wing government had done a month earlier --- but so far surveys of small businesses show that they still find it way too expensive to hire even an extra worker.

Note that instead of raising welfare-benefits as in the EU during the 1970s and 1980s --- or raising minimum wages as most of the EU countries continued to do in the decade afterwards --- the English-speaking market-oriented countries have instituted a far different policy: subsidies paid directly to the working-poor, through the tax system . . . a scheme originally conceived by Milton Friedman in the 1950s. In the US, this is known as the earned income-tax credit. Since 2001, the Bush administration has raised the credit from an average $1000 to an average $3000. Britain and Australia have similar schemes. By contrast, any efforts in virtually all the EU Continental countries to reduce minimum wages would likely be a sure-fire recipe for social protests, social conflict, and political punishment by the electorate.


 

We Can Generalize Even Further About the Long-Term Costs of the Welfare-State

What's true of rigid labor-markets can be extended to the performance of the rest of the state-capitalist economies. Welfare-benefits --- whether to the unemployed, the retired, or children --- all win immediate public favor. Higher taxes, the inevitable accompaniment, aren't popular, but might take years before they're introduced as compensation . . . by which time the next election has already been won by the governing party or coalition.

These problems, note, are complicated by the intense group-competition for government benefits in the EU Continent countries with their universal --- non means-tested --- welfare systems.

Initially, to use a term that Mancur Olson --- a pioneer political economist of public choice theory and collective-action problems (who, at the University of Maryland, surprisingly never won a Nobel prize for his original work during his lifetime) --- the populations of the EU countries united early on after WWII into a clear majority coalition in favor of dealing with the age-old problems of poverty, unemployment, and illness in Europe. Not surprisingly, the original benefits were aimed at dealing with them, and little else. Such majority coalitions --- in Olson's terminology, encompassing coalitions --- reflected the widespread recognition that the earlier decades of class-conflicts, ideological extremism, and political instability and violence and dictatorship had to be ended once and for all.

By the late 1960s, these age-old problems were rapidly diminishing on all fronts --- not just owing to the welfare policies initiated since 1945, but to general affluence thanks to rapid economic growth.

Then something happened.

By that date, most political parties in Europe were no longer separated by clear ideological differences between left and right. Essentially, everywhere in the EU, mainstream parties by the 1970s had become catch-all parties: they were now actively vying for votes --- almost always of the median voter, the wooing of whom could be modeled in game-theory manner --- and that meant delving out ever more benefits to voters and powerful organized interest groups.

 

More Generally, How Did the Populations within the EU Countries Respond?

To ensure that others didn't get more than they were, the members of the various majority coalitions --- which had been breaking down over the previous decade anyway --- splintered everywhere in the EU countries and began instead to organize themselves into clearly competing sectional interest-groups to obtain the most benefits for themselves. A vicious cycle of group competition ensued in every direction.

The competition pitted this trade union against that trade union in other industries or even --- as in the Latin countries or Britain (in the 1960s and 1970s) competing for members in the same industry; or pitted retirees against the working-population, with pension-benefits for the former coming at the expense of both higher income taxes and higher payroll taxes for businesses; or set public-sector workers, unionized to ever higher levels, against private-sector workers --- so that, say, in France during the 1990s, public-sector wages went up about two to three times faster than in the private sector; or inspired workers with job-security to extract wage-concessions from both employers and governments at the expense of consumers; or led to competition between parents with children who got family benefits and unmarried workers or married couples without children; or . . . well, the list of competitive groups is long.

Very long.

And generally, as it happened, governments started catering to the most powerful of these groups --- in votes, campaign money, or (in some countries) their power to strike and cause economic havoc, a French and Italian speciality. The next election, after all, was always looming just ahead --- if not on a national basis, then locally or for the EU parliament; and the key thing was to win it. Are political motives that simple? Often, but note: politicians, perhaps more than average people --- after all, they're always having to sell themselves to the public --- have a built-in tendency toward rationalization and even self-deception. If those in power recognized that they were upping benefits too fast, they could always rationalize what they were doing by assuming that, once they won the election, they would finally tackle head-on the future costs.

 

Two Brief Clarifying Comments:

(i.) Some political economists can adjust the modeling of party competition for votes to take into account different policy-preferences if they actually exist between the competing parties. On the EU Continent, though --- roughly between the 1960s and the start of 2000 --- consensual politics tended to prevail, and the policy differences between parties were generally minor in scope . . . especially if you cut through the political rhetoric surrounding party agendas. Where the differences are clearly ideological --- as when Margaret Thatcher's Conservative governments assaulted the foundations of the British regulatory and welfare-state system in the 1980 --- all these models of public choice break down. They can't handle the impact of such ideational conflicts.

(ii.) By the end of the 1990s, the policy consensus among mainstream parties on the EU Continent began to waver . . . particularly in countries like Italy, Austria, Holland, Denmark, Belgium, France, and to an extent in Spain. A clear sign was a series of constant breakthroughs of right-wing populist parties in local and national elections. The causes? A number of new social problems had been emerging in Europe --- especially violent crime and fundamentalist tendencies in the rapidly growing Muslim communities --- that mainstream parties ignored or side-stepped, unable to reach an intra-party consensus on what to do about them. To their surprise, the vacuum was filled by these new right-wing parties. Another cause was slowing economic growth and ever higher rates of unemployment in all but three or four very tiny EU countries on the Continent, and some mainstream parties on the right began to talk about welfare reform more seriously . . . not that they did much about it. When a left-wing party got serious about such reform --- for instance, Chancellor Gerhard Schroeder's Social Democratics --- the party split among an uproar, and Schroeder quickly lost most of its rank-and-file support, not to mention among the wider electorate.

And finally, as the recent referenda on the EU Constitution in Holland and France showed, more and more of the national populations were growing restive with the EU's rapid expansion --- both in membership and the projected increase in policymaking power. The split here, note, was really between increasingly disillusioned masses of voters on the left and right and mainstream party elites on both sides of the left-right divide. A similar split showed up in Spain, Italy, and elsewhere between public opinion and conservative governments that sided with the US and the UK over Iraq.

The outcome?

Once again, policy differences are begining to widen in most of the EU countries after decades of consensual politics. Even so, except for the strident and racist right-wing populist parties like those in Belgium, Austria, and France, these differences hardly approach the gulf that divided Margaret Thatcher's assault on the British welfare-state and both Labour Party policies in the 1980s and, for that matter, earlier Conservative Party policy-positions dating back to the late 1940s. Will that change in future decades? Will, to be more precise, new political polarization emerge in the EU countries?

The simplest prediction: yes, if economic stagnation continues, along with growing violent crime and increasing worries among the native Europeans about immigration and growing violence and fundamentalism in the Muslim minority communities. In the meantime, expect an increase of demagogic rhetoric from all sides of the spectrum to single out scapegoats for home-grown EU troubles --- including hoary hobgoblins like Jews, or Jew-controlled America, or American-dominated globalization, or the Chinese menace, or (in some countries) the growing Muslim influence in European life.


 

 

The Perverse Outcome Here?

The long-term costs that all this intense group-competition entailed --- with politicians responding to the most powerful (in organization strength, campaign money, or votes) --- weren't confined this time to just economic inefficiency. The costs extended to social behavior, social cohesion, and growing public cynicism.

In particular, high taxes inspired an ever faster growing underground economy in the EU. This was true even in Scandinavia, where the populations traditionally prided themselves on their civility: the best comparative studies of the underground economy's size --- carried out by an Austrian team of economists, with cross-checking procedures --- showed that in low-tax America, it seems to be about 7.0% of GDP. In Scandinavia and Northern Europe, it's 15.0% of GDP on an average, and in Southern Europe 20% or so. Equally, maybe even more worrying, what once inspired a sense of national cohesion in the early stages of the advanced regulatory and welfare-state systems of the EU not only split into competing groups vying for material advantages, it added to public cynicism --- directed at ever larger numbers of shirkers claiming sick-leave benefits without shame, or at powerful trade unions in the public sectors, or (as showed up recently in the referenda outcomes on the EU constitutions in Holland and France) general cynicism about the mainstream elites in power or vying for it in opposition parties.

The cynicism, mind you, isn't a result only of group competition for material benefits and political responsiveness to the clamor.

It's also an outcome of the growing waves of violent crime in the EU, much worse than in the US now (as repeated UN surveys of crime victims have shown since 1990), with governments unable to do anything effective about the violence; an outcome too of growing Muslim minorities, increasingly alienated and at odds with the secular populations around them; and a growing frustration with the failures of governments --- on the nation-state level as well as the EU regional level --- to do much that's effective about rising unemployment and growing job-insecurities in Europe at a time of rapid globalization and shifts in economic dynamism to Europe's disadvantage.

What politicians will tell the increasingly frustrated, cynical electorates that the latter economic troubles are the outcomes of what they all enjoyed getting in earlier decades . . . even after economic growth slowed markedly in the EU after 1975?

 

CAUTION: USEFUL AS IT IS, PUBLIC CHOICE THEORY NEEDS TO BE USED WITH CARE



Yes, useful and illuminating as it can be --- remember, the Swedish Academy awarded James Buchanan, a public choice pioneer, a Nobel Prize (Sweden has an unusual number of top-flight economists for its population size) --- the theory can be overdone. There are two exceptions to the self-interested instrumental behavior that it postulates as being the same in both the economic and political spheres --- with only the measure of success different: not wealth and income for politicians and bureaucrats, but rather power, prestige, and influence.

 

(1) First Caution: The Impact of Forceful Personalities Might Count in Unusual Political Circumstances

In exceptional national circumstances --- either a clear domestic crises or a major war with other states --- the personality of a country's Prime Minister or President can make a big difference . . . something that public choice has trouble predicting.

Clear domestic crises, it's true, are fairly rare. Think of the Great Depression of the early 1930s. Its mounting economic havoc puzzled ordinary governmental leaders and left them ineffectual. In fragile democracies, the system crashed and charismatic, brutal totalitarian leaders like Hitler came to power and made a huge difference. In a stable democracy like the US --- its unemployment level actually higher than Germany's in January 1933 when Hitler came to power --- Franklyn D. Roosevelt was sworn in as president two months later, and his policies made an immediate difference too. On a different level --- long-term economic stagnation and mounting social strife in the late 1970s and early 1980s --- Margaret Thatcher, the Iron Lady, became Prime Minister of a Conservative government and tackled reform head-on, colliding not only with the Labour Party and powerful trade-union leaders, but with right-wing Tory patricians in her own party. She too made a big difference in the subsequent institutional and policy changes her governments forced through in the 1980s. To an extent, that was also true at the same time in the US when Ronald Reagan replaced the ineffectual Jimmy Carter in the White House.



 

Clear wartime crises are fairly rare too, but when they occur, a strong personality --- even one like Winston Churchill kept on the Conservative Party backbenches by two different Conservative Prime Ministers in the late 1930s --- can count a great deal in rallying his country's morale and support for total war.

That happened when Churchill replaced Neville Chamberlain in the spring of 1940, just as Nazi Germany was overrunning Holland, Belgium, Norway, and France. To almost everyone's surprise, the same was true in more ambiguous circumstances when an unassuming Harry Truman --- a machine-politician chosen to be FDR's running mate in the fall of 1944 --- succeeded Roosevelt when the latter died in April 1945. He proved to be not just a strong leader at the war's end, but carried out a sweeping revolution in US foreign policy between 1945 and 1952 --- at the start of the cold war --- that only an exceptional individual could have succeeded at.

 

So a Hitler, a Mussolini, a Lenin or Stalin or Mao, can make a big difference in revolutionary circumstances, monstrous as they and their totalitarian systems turned out to be once they came to power in weak, collapsing states.

The same is true, operating within firm constitutional democratic systems, of a Churchill, Thatcher, Roosevelt, Truman, and Reagan. It's sobering to remember, though, that in the British system Churchill was considered unreliable and a war-mongering firebrand by the Conservative Party leaders during the 1930s, and would never have achieved power as Prime Minister without total war with Germany and the collapse of Britain's French ally in surprising, unforeseen circumstances. Margaret Thatcher, too, achieved power in something of an accidental way as well. Only when the two top candidates for the Conservative Party leadership were stalemated was she chosen, by the CP members in Parliament, as a compromise candidate in 1975 . . . then going on in 1979 to win her first general election and becoming Britain's Prime Minister.

 

The Second Caution: The Impact of Ideas At Certain Times

The second drawback of public choice theory if it's not carefully applied is more serious: it tends to play done too much the role of ideas --- especially big ones systematically organized, whether coherently or not, into ideologies --- in the political realm. If this weren't a drawback, there'd be no point for the buggy prof to look at the ideological origins of the existing state-capitalist and market-oriented industrial countries.

Agreed: in stable institutionalized systems --- democratic or traditional authoritarian (say, absolute monarchies) --- new, noticeably radical ideas, never mind full-blown ideologies, almost always play a distinctive secondary role in policy and institutional matters. The chief reason? In modern industrial democracies, mainstream parties move toward the center and for reasons public choice can easily explain --- the need to court undecided voters in order to win elections. Over time, accordingly, ideological differences between mainstream parties will fade or are played done, and fairly consensual politics nearly always prevails. That's true no less of the English-speaking democracies as it is of Japan and the EU Continental countries that adhere to statist-capitalism. Even when party activists --- almost always to the left of liberal or Social-Democratic leaders and the electorate, or to the right of their leaders and the electorate in Conservative parties --- push for more energetic application of full-blooded socialism or conservatism, the electorates in modern democratic countries tend to balk at radical change . . . at any rate, most of the time.

All of which restrains movements of democratic governments toward ideological zealotry.

Witness President Bush's plunge in public opinion since his election last November (2004), when he tried to push through social security reforms in line with right-wing conservative thinking, but at odds with the electorate's preferences and expectations. (Agreed: the Iraqi war's twists and turns have been another cause of his faltering popular support.) The same has been true of Gerhard Schroeder on the left in Germany. Had he stopped with the bold reform of unemployment insurance in that country, he would not have alienated the electorate the way he has, never mind his party activists. Alternatively, he might have still enjoy majority support had the one big reform made an difference of note in Germany's prolonged economic stagnation. The latter, though, was never in the cards. The entire state-capitalist system is buried under layers and tiny mountains of market-inefficiencies, and a disguised radical reform-program a la Mrs. Thatcher won't work in a tightly organized consensual system like Germany's today --- just the opposite.

 

When Ideologies Might Matter

On the other hand, ideologies can make a big difference just like personalities in clear conditions of domestic crisis --- or even economic stagnation over a lengthy period of time, accompanied (as in Britain in the 1980s) by growing social strife. Usually, to put this in crisp shorthand, it takes both an unusually inspiring, determined leader and fully fresh policy ideas --- radical ones at that, within the constitutional confines of stable democratic systems --- for sweeping institutional and policy changes. That was true of FDR's New Deal in the 1930s, and Ronald Reagan's conservative, free-market reforms in the US in the 1980s . . . just as the latter were, only in more radical, strife-laden ways, in the Margaret Thatcher era of the 1980s.

So ideas can count, even radical ones at certain times in stable democracies . . . rare as the combination of national crisis, powerful outside personalities, and radical ideas happy to be in such countries.

 

Ideologies in Democratic Systems Aren't the Same As Those in Totalitarian Systems

In authoritarian systems that break down or weak and unstable democracies that stagnate or collapse --- think of Russia in 1918, China in 1911 or again after 1945, or Turkey after 1918 --- revolutionary leaders who succeed in seizing power and institutionalizing another, radically different political-economic system seem to meet all these three conditions more closely still. True, a Lenin leading a zealous, disciplined Communist Party or a Mao doing so in China after 1945 (like Chiang Kai-Shek leading the Nationalist Party in the 1920s) or an Ataturk and his military in Turkey during the 1920s are fairly rare too; the same is also true of right-wing revolutionaries like Mussolini and Hitler in interwar Europe. Even so, they might not be as rare as leaders and radical ideological breaks seem to be in democratic countries --- remember, radical means something different within the confines of a constitutional system --- but they're fairly rare all the same.

But be careful!

There's a world of difference between the ideological changes implemented in stable democracies like the US or Britain by leaders like Frankly D. Roosevelt and Margaret Thatcher, and those carried out with ruthless, mass-murdering fervor by fanatical revolutionaries like Hitler on the right or Lenin and Mao on the left in the ruins of collapsed political systems. The manic changes that occurred in Germany after 1933 or in Russia after 1918 or China after 1945 were totalistic and uncompromising. They swept across the whole of political, legal, economic, and intellectual life, with all facets of national existence brought under brutal totalitarian rule . . . all in the name of monstrously crazed ideological schemes. In the process, million of their own countrymen --- or tens of millions --- were imprisoned, tortured, or killed outright.

 

The Moral of All This?

Bold ideas of an ideological sort, along with bold and powerful individuals, will make a difference at times in both democratic and non-democratic systems. To ignore them as public choice theory does --- if used in a sweeping manner to analyze and predict political behavior --- is to simple.

Agreed: most of the time countries aren't in national crises, or conditions of acute economic distress matched by growing social strife. Even then, powerful charismatic leaders might not arise; and if they do, their chances of imposing radical changes in institutions and major policies that are motivated by boldly new ideas or ideologies might not succeed. What is clear, though --- as the earlier examples showed --- is that from time to time these three forces of of powerful personalities, radical or revolutionary ideas, and national crises will materialize and defy public choice analysis.



 

Part Three:
THE SECOND BUGGY EXPLANATORY EFFORT:



THE IMPACT OF IDEOLOGIES IN SHAPING
THE DIFFERENT INSTITUTIONS AND POLICIES OF THE STATE-CAPITALIST AND MARKET-ORIENTED COUNTRIES IN THE DEMOCRATIC INDUSTRIAL WORLD.


Hardly a surprise, this second explanatory thrust --- at any rate, not if you've been following the wider buggy series since last December 2004, or even the latest follow-up series that began in early May 2005. By now, from a variety of theoretical angles in this and earlier buggy articles, you know that Japan and the EU Continental countries have performed badly in both economic growth and job-creation for two or three decades compared to the English-speaking countries. We also now know what accounts for this markedly divergent economic performance: their very different institutional structures and policies.

 

Dominant Decision-Making Power in the Two Capitalist Systems

In particular, the statist-capitalisms in the EU and Japan assign a dominant decision-making role to the state --- and hence political logic and calculations --- when it comes to grappling with the dislocating economic and technological changes unleashed in rippling, rapid-fire ways by global capitalism since 1980 or so. What follows has been predictable. Since political calculations and maneuverings dominate market-incentives and flexibility in adapting to these turbulent changes, the forces defending the economic status-quo in state-capitalist countries have tended to prevail and hence block or divert the gales of creative destruction pressing upon each of their economies . . . all this, mind you, even as their economic performance has noticeably staggered.

Not so in the English-speaking countries.

All of them, even the US, have carried out a series of sweeping market-oriented reforms since the start of the 1980s. The more they've reformed and let market-driven incentives and flexibility work their impact, the more successfully their private firms, entrepreneurs, innovators, and financial markets have responded in coping successfully with the forces of radical technological and economic change. The result? An enhanced economic performance of the market-oriented . . . not just compared to the state-capitalist countries, but to their record in GDP growth and job-creation before 1980.

Against this background, several key questions or points quickly prompt themselves:

 

(1) What Explains These Different Institutional and Policy Trends?

The easiest way to answer this is to rephrase the question in a useful double-barreled way:

  • What explains, on the state-capitalist side, why Japan and the EU Continental countries have fostered an intricate, tightly organized system of economic and political institutions and policies, even as it has proved increasingly rigid in coming to terms with the radically changed nature of global capitalism for two or three decades now? Why, to be more precise, did they even adopt the state-dominated system after 1945, and what accounts for the failures of their governments --- for all their huffing-puffing rhetoric about needed reforms and changes to revive their economic vigor --- to do more than nibble around the edges f that increasingly dysfunctional system?


  • Inversely, what explains why Britain, Ireland, Australia, and New Zealand also adopted an elaborate regulatory and welfare-state system after 1945 --- with only the US avoiding such commitments? And why, a little more than three decades later --- when their economic vigor seemed at low-ebb --- did all these English-speaking countries carry out sweeping market-oriented reforms in their institutions and government policies . . . a big two-pronged reversal that even the US emulated in its own more market-oriented system?


Yes, the latter point needs to be stressed. Starting in the late 1970s, both Democratic and Republican presidents began to de-regulate much of the American economy, first by a series of de-regulation; and followed by extensive market-oriented reforms over the next 25 years: further de-regulation, further openings to the global economy (including NAFTA), lower taxes, and eventually in the late 1990s a sweeping set of changes in welfare-policies. A much more competitive, flexible economy has resulted, particularly encouraging to entrepreneurial innovation and new productivity growth even as the Schumpeterian gales of creative destruction continue right now to work their transforming impact.

 

The Answers

Stripped to their bones, the answers to these double-barreled questions are straightforward and easy to grasp.

Start by thinking historically. Go back to the late 18th century. During the long epochal transition that began in that period and lasted over the next 150 years or so, twenty largely agrarian, monarchical societies in West Europe and North American --- later in Japan --- were transformed root-and-branch, emerging after WWII as highly developed industrial and democratic countries. The transition was never easy and free of domestic conflict and turbulence anywhere. How could it be? The key point about this transition stands out in vivid clarity all the same. The radical economic, social, and political changes that relentlessly buffeted these 20 countries for a century and a half were handled far differently in the English-speaking countries --- as well as in Scandinavia, Holland, and Switzerland --- than in the rest of the European continent and Japan.

Tersely put, the epochal transition generated far more strife and violent upheavals, both domestically and in foreign relations, in most of Europe and Japan than in the English-speaking countries; and in the process, a big divide opened up in their institutions and ideological heritages.

  • In the English-speaking countries, democracy came early and evolved out of constitutional monarchies; industrialization began early too, especially in Britain and the US, and the role of the state in fostering it was limited right into the 1930s; and a centralized, powerful state never emerged as it did in Japan and most of West Europe to deal with the sharp, unruly conflicts that attended these epochal changes. The result was a far different ideological heritage. Marxist socialisms never had a mass appeal in Britain, Australia, New Zealand, or Canada, let alone in the US. Oppositely, the kinds of statist-conservatism that flourished in West Europe or Japan --- never mind militarized, authoritarian conservative and later Fascism and Nazism --- never took root in the English-speaking world either.


  • By contrast, in all of West Europe except for Scandinavia, Holland, and Switzerland, violent, strife-coiled conflicts raged during almost all the 150 years of turbulent change. These conflicts raged in politics; they crackled in economics; they generated class- and ethnic-conflicts; they set off searing clerical and anti-clerical struggles that lasted generations; they rippled reatedly in nationalist upheavals, militant jingoism, and warfare; and by the early 20th century, ideological extremism was blazing in nearly a dozen European countries in the western half of the Continent. .


If you want a rough-and-ready guide to grasp what was happening elsewhere in Europe, think in these terms: the more you traveled southward or eastward in Europe in the first decades of the 20th century, the more backward economically and unsettled politically the countries were. Not surprisingly, the upheavals and violence in Austria, Spain, Portugal, Greece, and all over East Europe --- the countries in the latter region gaining independence only after the collapse of the Ottoman, Austro-Hungarian, and Czarist Russian empire before and after WWI --- were equally pervasive and generated similar shocks of ideological extremism and armed, high-coiled domestic strife. Russia itself, a backward country that cracked apart under the strain of fighting the Germanys in WWI, came under Communist totalitarian rule after 1918

  • In Japan, too --- which began to modernize after a lengthy internal war in the 1860s and 1870s --- domestic conflicts and violence flared off and on, including militarized coups and repression in the 1930s, extremist nationalism of a fascist racist sort, and extremist ideological responses too. On the left, both Communism and revolutionary Socialism took root in the country by the start of the 1920s. On the right, the response of conservative elites was to embrace the radical militarist and racist program of the extremists in the Japanese army, who started carrying out a series of assassinations aimed at moderate politicians in 1932 and captured control of the political system after 1936. .


What followed was the creation at home of a fanatically jingoist, authoritarian state that resembled Italian fascism in numerous respects --- without a specific fascist party, however. Abroad, after conquering Manchuria in 1931, the fervently militarist regime then invaded China in 1936 and, five years later, launched an an aggressive, suicidal war against the United States, Britain, Holland, and Australia that led to Japan's total, unconditional surrender 1945 . . . its cities smashed and burned and its economy and political system in tatters 

 

(2) The Long, Epochal Transition and Its Upheavals Clarified

The long, endlessly stormy transition to the modern world --- which began in the late 18th century (after previous centuries of change in West Europe) and ended in 1945 --- was marked from start to finish by several revolutionary upheavals in the pre-industrial countries of Europe, Asia, and the New World, all more or less overlapping.

The term ended, mind you, can be misleading here. It applies to West Europe, Japan, and the English-speaking countries, all fully industrialized, prosperous, democratic, and stable over the last 60 years --- with the major political parties in all of them moving increasingly to the moderate center in ideological outlook; and for the first time, note carefully, in the modern history of Japan and the Latin and German-speaking countries in Europe. Not so the rest of the world. Most of Latin America, virtually all of Asia, the Middle East, and Africa are still caught up in the throes of these wrenching, multiple revolutionary upheavals. And East Europe? Thanks too to the end of the Cold War and the collapse of the Soviet empire in 1990, most of the countries there have largely moved for the first time in the direction of stability, moderate democratic politics, and industrialization . . . those in the Balkans less so than elsewhere in the region.

 

What, In More Concrete Terms, Did These Lengthy Revolutionary Eruptions Amount To?

Roughly, six or seven of these revolutionary shock-waves that shaped the modern world, invariably in disruptive ways, emerge in historical prominence:

(i.) The shift from agrarian societies to highly industrialized ones, always lengthy and disruptive everywhere, but doubly so in relatively backward, feudal or semi-feudal countries from the late 18th century onward.

The most advanced countries in 1800 were all in Northwest Europe and North America. Small wonder that they would emerge eventually as the richest, most modern urban societies by the end of the 19th century.

Within Europe, to clarify briefly, Britain in 1800 was the most modern in its financial institutions, levels of literacy, national cohesion, and agricultural productivity. Its peasantry had disappeared by then, replaced by a property-less agrarian working class. It also had the largest, most risk-taking middle class --- especially among Protestant Dissenters --- and the relations between the dominant landlord aristocrats and rising urban middle classes were largely free of the conflicts and hostility that prevailed in almost everywhere on the European Continent.

France, by contrast --- despite some modern areas in Paris or to the north --- was convulsed by its radical revolution of the early 1790s, and then by 20 years of almost constant warfare under Napoleon with the rest of Europe. It would undergo revolutionary and counter-revolutionary waves in 1830, 1849, and the early 1870s. The Napoleonic wars also held back the industrialization of other parts of Europe for a generation. As for Germany and Italy, they weren't unified into nation-states until the 1860s and 1870s, even though the urbanized parts of the Rhineland and the Pau-river valley were fairly modern and advanced by contemporary standards. Otherwise, the Italian and German states were either semi-feudal and backward; the Iberian countries more so still, save in the Barcelona and Basque areas of Spain. Holland --- a briskly inventive, increasingly urbanized country in the 17th century --- declined in the 18th and 19th into a rentier-society of timid risk-averse middle class oligarchs, though the French-speaking area of tiny Belgium (sometimes united with Holland, usually not) was modern and started industrializing early too.

Elsewhere, virtually all of East Europe and Russia were outrightly feudal still. They would remain that way well into the 20th century.

In North America, the northern, slave-free states not only matched or surpassed the British on these points, they had a far larger property-owning middle class of independent farmers, and risk-taking and alertness to new technologies were fairly pervasive in both urban and rural areas.


 

(ii.) The emergence of an entirely new class system of increasingly confident, powerful middle classes and an ever larger, initially poor industrial working- class, both of which came into conflict, in the early stages of industrialization, with the traditional agrarian classes --- wealthy and prestigious landlord aristocrats, subordinate peasants, clerics in the Catholic, Orthodox, and Muslim countries, and small urban groups of skilled craftsmen --- and then later, as industrialization advanced, collided with one another.

The subsequent struggles between these classes in both eras was always relatively peaceful in the English-speaking countries and in Scandinavia, Holland, and Switzerland; but strikingly conflict-laden and violent elsewhere in Europe, in Asia, and in Latin America . . . to the point that they convulsed their political and economic lives for generations.

 

(iii.) The struggles --- almost always violent (even in the Irish part of Great Britain) --- for and against democratic government.

Britain and the US emerged as stable democracies early in the modern era --- the US in the 1790s, the British in the 1830s. Though stable democratic systems came later to Scandinavia, Switzerland, and Holland, they did so without violence.

Not so elsewhere in Europe. France was convulsed in the late 18th and most of the 19th century by cycles of revolution and counter-revolution; a stable democratic system emerged only in the mid-1870s, even though the next three decades were consumed with clercial and anti-clerical conflicts. Democratic institutions that held Cabinet government accountable in all political domains never emerged in Germany or Austria until the 1920s, remained ineffectual or unstable, and fell to fascism soon afterwards. In Spain, Portugal, and Italy, democratic systems came late in the 19th century, were either unstable or fairly meaningless electoral conflicts between elitist oligarchies, and were entangled from the outset in regional struggles, class struggles, and clercial and anti-clercial clashes. Later, like Germany and Austria in the interwar period, their political systems were all captured by either militarized Reaction or outright Fascism.




 

(iv.)The ideological struggles between capitalism and socialism of various sorts. The more strife-laden and violent the class-conflicts tended to be, the more new ideological movements on the left and right polarized toward the extremes. In the more ideologically divided countries, the sharp, frequently violent ideological clashes between various kinds of capitalism and socialism overlapped the struggles for or against democracy.

Again, to look only at the early industrial countries, the ideological spectrum in the English-speaking countries remained generally moderate. Neither Communism nor revolutionary socialism emerged on the left, nor militarized reactionary Conservatism, let alone Fascism, on the right. The British working-class, which began to get the franchise in the 1860s, continued for another 30 to 40 years to vote for either the Conservative or Liberal Party, no Labour Party emerging until 1900 . . . and not winning an outright majority of the vote in any national election until 1945.

By contrast, except for the moderate Scandinavian countries, Switzerland, and Holland, ideological conflicts raged in Europe with increasing intensity throughout the 19th century and well into the 20th century, and in the interwar period veered toward sharply hostile polarization. The same was true of Japan in its only brief semi-democratic era of the 1920s.


 

(v.) Struggles for national independence in European empires --- whether in the overseas colonial areas of Africa, Asia, and the Americas or in the home-grown ones over subject peoples in Central, Southern, and Eastern Europe (Tsarist and later Communist Russia, the Austro-Hungarian Empire, and The Ottoman Empire). Later, the struggles would be extended to American and Japanese expansion as these two countries industrialized and eventually became great powers around 1900.

For the first time in world history, accordingly, empires are now passÚ, and the globe is now divided into about 200 independent and sovereign territorial states . . . almost all of them except in tropical Africa and parts of the Middle East and Central Asia firmly planted, stable, and legitimate, whatever else might continue to roil their domestic politics. And for the first time --- thanks to Anglo-American liberalism and power --- age-old slavery, part-and-parcel of world history, was finally destroyed in the 19th century everywhere save in some existing Muslim states of the Middle East and North Africa.

 

(vi.) The violent, warring struggles for hegemonic global dominance between the great powers ---- Britain, France, Russia, Austria, Germany after 1870, and later Italy, the United States, and Japan --- all of which culminated in WWI, WWII, and the Cold War (1945-1990).

Not the least of the direct outcomes of repeated Anglo-American victories has been the creation for the first-time of an institutionalized, rule-based global economy that looks essentially like Anglo-American economic liberalism on a world-scale . . . just as, for the first time too, it no longer provokes ideological challenges from the violent extremes of Marxist Communism or radical Socialism on the left or Fascism and ultra-nationalist autarchy on the right. With, of course, one exception: radical Islamist fundamentalism, especially of the violent and fanatical sort.

Otherwise, political opposition in either the highly industrialized countries or even the developing world is sporadic and episodic, often confined to the populist right or left . . . much to the dismay of left-wing radicals everywhere.


 

(vii.) Finally, as a recurring series of shock-tremors within the larger, lengthier tumult of industrialization, there were the 50 to 60 year eruptions of long-waves of radically restructuring technologies, all entailing powerfully dislocating gales of creative-destruction that Schumpeterians have analyzed the most profoundly.

Those countries by 1914 or so that had restructured their domestic institutions and policies for sustained economic growth --- which meant West Europe, the English-speaking countries, and Japan, with some progress in parts of Central Europe --- were best able to adapt to these dislocating gales, absorb and diffuse the new technologies within their economies, and hence emerge subsequently as ever richer countries even as most of the world remained poor and backward. Imperial rule played only a minor role in this backwardness.

The evidence here is overwhelming.

For that matter, Latin America --- which increasingly lagged behind North America in economic growth and prosperity --- was free of colonial rule for decades by then. China itself was never formally colonized, nor was Egypt after its independence from the Ottoman Empire in the 1820s. Marx himself --- Lenin too come to that --- argued that European imperialism was, if anything, a progressive force of change in these very backward regions of the world. It disrupted their traditional religious and social structures, undermined much of their autocratic and landlord rule, and integrated their economies into global capitalism.


 

The Significance of These Interacting Revolutionary Waves Can't Be Overstated

If you're to understand the modern world and how it has emerged as it stands today, you need to understand each and every one of these revolutionary shock-waves --- lengthy in their eruptive, dislocating impact on agrarian societies everywhere for over 200 years now. Grasp them all, and you'll have a good working-idea of why so many nationalist wars, extremist ideologies, hegemonic warfare, and revolutionary uprisings and counter-revolutionary backlashes --- all violent --- joined with modern science and radically restructuring technologies to shape our contemporary lives . . . individually, and across the two hundred or so sovereign nation-states today. And also, of course --- given the fast-moving integration of the entire globe, both economically and in security matters --- on the global level as well.

That includes the once sharp division in wealth and power between the rich industrial countries of West Europe and the English-speaking world on one side and the rest of the world's peoples save for the Japanese, all deplored at length in tedious, misleading new left-wing theories of dependency so beloved by New Left radicals in Europe, North America, and Latin America in the 1970s and 1980s. Not by accident, were these bankrupt theories sharply criticized not just by mainstream economists, but Marxist scholars themselves.

In the last two decades, we know even more how misconceived and wrong-headed these theories were.

The unprecedented rise of first Pacific Asia, then more recently of China and India --- two countries that together have almost 40% of the world's population in the developing world --- underscores this point, as well as blunting more and more that sharp division. The same observations apply, by the way, increasingly to the former Communist countries of East Europe. What have both the new Asian dynamos and these new capitalist countries have in common as the major engine of their rapid industrialization? In plain English, they have --- for the first time in their history --- shaped fairly efficient economic and financial institutions, along with an increasing reliance on comparative advantage and other market incentives within the framework of their national economies. The big question mark that remains hangs over China's fate, political and economic alike . . . a giant country with a giant Communist Party of 60 million highly privileged people, all doing well or getting rich as it continues to wield a monopoly of political party and to repress individual liberties, inquiry, and expression.

More to the point, understand all these revolutionary shock-waves, and you'll be able to follow with ease the rest of the buggy argument that now unfolds, focused rigorously on our main concerns in this buggy series. Namely,

 



(3) How The Interacting Revolutionary Shock-Waves Eventually Shaped
Contrasting Institutional and Ideological Responses in the State-Capitalist and
English-Speaking Countries Down to 1945.


What follows is only a summary analysis; nothing more. A whole book --- maybe several ---- could easily expand on the main buggy points that the analysis unfolds. It's enough for our purposes that you grasp these points. When you're through with your reading, you should be well situated to understand why Japan and the EU Continental countries fashioned after 1945 state-capitalist economies --- tightly organized, full of elaborate regulations of both product- and labor-markets, and marked by high levels of government spending and welfare-transfers.

So fix your attention now, first and foremost, on

 

1. The Chief Causes That Prompted the State-capitalist countries in the industrial world --- whether Japan or in Europe --- in Shaping Such A State-Dominated System After 1945?

In plain, to-the-point language, their historical experiences in handling these overlapping revolutionary waves in the previous 150 years required an entire new start at the end of WWII --- political and economic alike.

In particular, the more their national societies had been disrupted by the repeated, long-lasting shocks of these revolutionary disruptions, the more their politics and economic life had been caught up in violent, conflict-blasted experiences in handling them. World War II was the culmination of those tumultuous struggles. A blood-soaked, hegemonic clash of militarized Fascisms, Soviet Communism, and the democratic liberalism of the English-speaking countries, it brought to a halt --- abruptly, and at great human sacrifice (a good 50 million people killed world-wide) --- their internal violence and political extremism. When it ended, German and Japanese sovereignty was shattered; Fascism and Nazism were in ruins; Europe was divided into two halves; and under an American protectorate, both Japan and West Europe quickly evolved into stable, democratic countries, forged an elaborate alliance with the US in the cold war against a common threat; and finally stopped --- once and for all, it seems --- militarized nationalist hostility and warfare in Europe that had been waged for centuries.

What their new, post-war governments all faced after 1945 were hang-over challenges that derived directly from this strife-marked history. In clear English again, their future democratic stability and social peace hinged directly on their ability to end class-hostilities and ideological extremism . . . especially, after the destruction of Fascism and Nazism and amid the Cold War, of settling once and for all the ideological clashes between capitalism and socialism.

 

2. Politics: Why Democracy Finally Triumphed On the Western Half of the European Continent After 1945, and in the Eastern Half after 1990.

Only at the conclusion of WWII did stable democratic institutions implant themselves firmly in Japan, Germany, Italy, Austria, and even France . . . followed in the 1970s by similar political developments in Spain, Portugal, and Greece. Only then did the age-old conflict between capitalism and socialism --- ideological, political, and frequently violent during that epochal transition --- come to an end. And only then did both extremist ideologies on the left and right as well as extremist nationalism come to an end too. And it didn't happen overnight. The French Fourth Republic, note, crashed to pieces in 1958 as a result of a threatened military coup by the French army in Algeria. When the Fifth Republic emerged a few months later and Charles de Gaulle became its first president, it was the 14th different political system France had experienced since 1789 . . . the start of the French Revolution, and the same year as the US Constitution was signed. Greece, Portugal, and Spain were right-wing dictatorships until the late 1970s, and at the end of the decade, parts of the Spanish military were still planning a coup to bring down the new post-Francoist democratic system.



Knowledgeable historical observers will note the key cause of these momentous political changes in Japan and on the West European Continent after WWII:

It was the triumph in WWII, as in all the major hegemonial wars among the great powers since the 1790s, of the two great liberal English-speaking powers --- the British and later the US (with Britain) --- against their main great-power challengers, all of which pursued ideological goals in foreign policy markedly at odds with Britain's and the US's own liberal constitutional and market-oriented heritages: Napoleonic France in 1815; later militarist Germany and Austria in WWI; later still Nazi Germany, Fascist Italy, and militarist Japan in WWII. And later still, of course, the Soviet Communist Empire in Europe.

More specifically, only the Anglo-American victory in West Europe in 1945 liberated occupied France, Belgium, Holland, Denmark, and Norway from Nazi rule, just as it shattered the Nazi and Fascist systems in Italy and Germany or the militarist, semi-Fascist system in Japan. And only an American protectorate established over West Europe from 1949 on --- the start of NATO --- ended the security fears that enabled West Germany to reconcile with its western neighbors, rearm, and join in the development of regional cooperation . . . even as, simultaneously, the US joined with its allies to win the cold war and eventually force the Communist Soviet empire into collapse, freeing its European colonies for the first time to develop their own stable democratic institutions and economic compromise between capitalism and socialism

And only then were all these countries free to fully institutionalize a state-capitalist system that was and is simultaneously democratic and a compromise between the clashing visions of capitalist markets and socialism.

 

3. Economics: The Role of the State Was Always Greater in European and Later Japanese Industrialization Than in Britain and the US

On both the left and right in Japan and on almost the entire European Continent, statist movements and political parties dominated their politics in the long era of industrialization during the 19th and first part of the 20th centuries. There were some short-lived exceptions in West Europe, especially in the 1850s and 1860s, but they soon fizzled out. As a general thing, except for centrist liberal parties in a few countries that began to lose electoral support where democracy existed, statist- ideologies dominated the politics of both the left and right. Whether socialist or statist-conservative, mass political parties manifested a marked mistrust of free-market capitalism, and generally the industrialization on the European Continent and Japan was nurtured far more than in Britain or the US by active governmental subsidies, government-sponsored investment banks, protective tariffs, and even industrial targeting.

 

No surprise really.

The spearhead of both British and American industrialization was a large, confident, and increasingly dominant middle class . . . overwhelmingly Protestant (and in Britain, members of non-Anglican Dissenting sects ), enterprising, risk-taking, and full of conviction that wealth-making was God-ordained.

By contrast, almost all of West Europe other than Holland, parts of Belgium, parts of Northern France, and Scandinavia lacked the institutional and cultural strengths to emulate the British or American forms of market-oriented industrialization. The further south and east you moved in Europe, the more medieval, semi-feudal, and illiterate the countries were --- Italy, Spain, Portugal, Germany (other than the Rhineland area), the Austro-Hungarian empire, the Ottoman Empire, the Russian empire . . . not just in 1815 after the Napoleonic wars, but several decades into the 19th and early 20th century. The same was true of Japan, only more so after the Meiji Revolution in the 1870s.

 

(i.) Consider first the far different social structure in Japan and most of Europe in the early and mid-19th centuries.

It was more backward and semi-feudal than in the English-speaking countries, with the majority of the populations illiterate peasant farmers --- serfdom itself wasn't even abolished in Prussia until the 1820s (Russia the 1860s) --- and with the top of the social hierarchy dominated by landed aristocrats and traditional middle class lawyers, doctors, professors, clerics, bankers, merchants, and high-level civil servants. The newer entrepreneurial middle classes were smaller and less energetic and far more timid than in Britain or the US. At the same time, landed, usually militarized aristocrats and the traditional urban middle classes who aped their life-styles were far haughtier and resistant to mingling on equal terms with any of the new middle class rich, whom they regarded with contempt --- nouveau-riches hucksters of a vulgar sort. , than happened to be the case in Britain. (In the US, the equivalent haughty and militarized aristocracy lived in the slave-holding South, and its prestige, power, and wealth were shattered by the Civil War.)

 

(ii.) Nor was that all.

National markets tended to be far more fragmented than in Britain or the US. With a few exceptions, private banking was also far less developed than in Britain or the US. The same was true of stock-markets after they flourished in Britain and the US from the 1860s on. Even today --- at the start of the 21st century --- the role of stock-markets as the main source of corporate investment funds, which came to dominate American and British business, is much weaker in Japan and on the European Continent than in the English-speaking countries. As for the newly emerging urban working classes, they encountered guild-like restrictions in not just Japan but all over the Continent of Europe that were medieval in nature and practice. For that matter, much of industry after 1815 was itself organized into guilds and corporate bodies that further restricted the activities of risk-taking entrepreneurs . . . assuming they could ever get financial support for a new successful start-up business that would allow it to become a large manufacturing firm.

To an extent, Belgium, Holland, and the tiny Scandinavian countries --- especially Sweden and Denmark --- were sufficiently different on these scores that they could emulate the British model to an extent, though even then governments were more active in fostering their industrialization than was the case in Britain or the US. Otherwise, to move from agrarian to industrialized economies and social structures, economic development in Europe and Japan had to find ways to compensate for their institutional and cultural handicaps.

 

(iii.) How did the Continental countries and later Japan compensate for these disadvantages compared to Britain and the US?

The answer: it was the state that came to the rescue.

In European and Japanese industrial development, it assumed a much bigger role from the start than in the English-speaking countries. We mentioned a minute or so ago what it did. It's worth mentioning again: governments subsidized new manufacturing, offered protective tariffs, protected agriculture to win over peasant and landlord support, created a series of state-guided investment banks, and worked actively with private enterprise to foster railway and other infra-structure development. It also worked closely with private business to foster technological progress, including the importation of British and American technologies where they were for sale, and if not, by other means (including piracy). There was more too. The state fostered a large merchant marine where private enterprise was lacking, and later --- in Germany, Italy, France, Russia, and Japan --- built big navies to challenge British dominance of the seas despite Britain's policy of maintaining the sea-lanes open to commerce for all the world's shipping.

The latter point is worth briefly elaborating on.

Not only did the state play a bigger role in European and Japanese industrialization, in those countries that aspired to great-power status it structured industrialization and infra-structure development with an eye to military power. The German railway system, for instance, was purposefully built with military needs in mind: above all, the ability to transport large numbers of troops and supplies quickly to the German frontiers . . . a huge advantage that showed up early on in the Franco-Prussian war of 1870-71 as well as in WWI. Similarly, instead of emulating the early stages of British and American industrial enterprise --- light industry --- Japanese and European governments encouraged their local manufacturers to stress heavy industry from the start . . . not with an eye simply for economic growth, but for the military benefits that steel, railway, shipbuilding, and arms-manufacturing would entail.

Similar motives inspired the protection of agriculture. There would be none of the free trade in agriculture that marked British economic development after 1850. Instead, self-sufficiency among the great powers --- or those countries like Italy that aspired to that status --- was regarded as a national priority by the latter decades of the 19th century.

 

(4) A History of Class-Conflicts, Violence, and Political Extremism Marked Virtually All The
State-Capitalist Countries Before 1945,
All of Which Showed Up in Ideological Extremism Polarization




As state-guided industrialization and monopoly forms of capitalism began to boom in the late 19th and early 20th centuries --- late industrializing follower-countries almost always growing faster than early industrializing lead-countries once they launch onto a course of sustained GDP growth --- intense class conflicts within their more backward social structures ensued everywhere on the Continent of Europe and in Japan. Clerical and anti-clerical struggles raged as well in the Catholic countries, as did extremist nationalism and Social-Darwinian racism.

The result?

Political and Ideological Extremism

By the interwar period (1919-1939), extremist and violent ideologies were rampant in Japan and everywhere in West Europe except in Britain, Scandinavia, Switzerland, and Holland . . . all regions or countries except Switzerland with constitutional monarchies that had early evolved stable democratic institutions.

Communism, revolutionary socialism (either in practice or rhetoric), and syndicalist anarchism flourished on the left, and militant racist Reaction and outright Fascisms or Nazism on the right. By 1939, democracy had failed in Italy, Germany, Austria, Spain, and Portugal, all governed by militarized Fascism, clerical autocracies, or Nazism. In the newly independent East European countries, it was a similar story except for Czechoslovakia, a democracy until the Nazi invasion in March 1939. Elsewhere, right-wing dictatorships governed with repression and demagogic nationalism, plus extensive anti-Semitic racism . . . a big appeal to the angry, confused, and poor peasants, besieged aristocrats, and uneasy and fearful urban middle and lower-middle classes --- all eager to blame their economic plight and fears of one another on Europe's traditional bogeyman scapegoat.

In East Europe, that left only the Soviet Union --- governed by a homicidal totalitarian Communist Party since 1919. When World War II began in Europe in September 1939, then, there was only a small band of solid democratic countries on the entire Continent: Britain (42 million) and the tiny countries of Ireland, Norway, Sweden, Finland, Holland, Belgium, and Switzerland. France --- also about 42 million in population and democratic since 1875 --- was torn in two by a latent civil war between the polarizing left and the forces of the right, and immediately in the aftermath of the German victory in the spring of 1940, a right-wing dictatorial government came to power in Vichy . . . a small resort town in southern France.

Note that collaboration with the Nazis wasn't confined to the Vichy French government during the war. In occupied Norway, Holland, and Belgium, similar collaborating regimes came to power; and all of them --- along with the French --- cooperated with the Nazis in sending their local Jewish populations to the death camps.

Only occupied Denmark resisted. It managed to ferry its small Jewish population to safety in neutral Sweden. As for Sweden, like Switzerland it leaned toward Nazi Germany during the war, and the economies of both were important to keeping Germany fighting well into 1945. (Finland, attacked by the Soviet Union in late 1939 --- some of its territory annexed by the grasping Communist regime --- later joined with Germany and its allies in the invasion of the Soviets in June 1941. Pointedly, unlike the collaborating West European regimes occupied by the Nazis, neither Finland nor another Germany ally, Bulgaria, allowed their small Jewish populations to be sent off to the death camps. The same was true of Francoist Spain, a carefully neutral country.)

Japan

As for Japan in Asia, it's enough to observe that its brief experiment with parliamentary democracy in a truncated form during the 1920s crashed to the ground the second the Great Depression hit its economy. In the 1930s, as we noted a minute or two ago, fanatical expansionists in the officer corps of the Army killed off moderate politicians and forced the others into acquiescing in a war first in Manchuria in 1931, then in China after 1936, and then against the Americans, the British, and the Dutch in 1941 . . . by which time a reactionary, repressive, ultra-jingoist dictatorship of fascist tendencies had seized all political power for itself.

Little more than four years later, its cities smashed and ruined --- its economy shattered --- Japan's war cabinet surrendered unconditionally to the victorious allies and was put under the control of an American military government, which then implemented several democratic reforms: free elections, parliamentary government, the protection of trade unions, land reform, and educational opportunities for women. The American governing authority also set up an anti-monopoly agency and ostensibly broke up the powerful interlocking cartels known as zaibatsu that had a lock-grip on the Japanese economy for decades. It was to no avail. As soon as Japan recovered its sovereignty in 1949, the cartels came back under a different name --- keiretsu --- and were even encouraged by successive Japanese governments to cartelize further, the better for the state to influence and regulate them.

In many ways, the Japanese economy of the 1950s and 1960s resembled in its state-capitalist regulatory system the system of war-mobilization with which the Japanese fought World War II. Some of the regulatory apparatus was removed in the late 1960s and 1970s, but it entered the era of stagnation in the 1990s largely intact . . . one LDP government after another pledging to deregulate and move quickly toward a more flexible, market-oriented economy, only to slow or block radical reforms as soon as both LDP backbenchers and public opinion resisted.

 

The English-Speaking Countries

By now, you're no doubt fully aware of their far different economic and political history during the long, shock-laden transition to fully industrial and urban societies. Note simply that they never fostered large social movements or mass parties at either ideological pole; the mainstream political parties and movements in the 19th century --- even in Britain or Ireland, never mind Canada, the US, Australia, or New Zealand --- never betrayed any marked pro-statist distrust of free markets; and even when Labor parties developed in some of the English-speaking countries after 1900, they were non-Marxist and conciliatory from the outset, eschewing the whole notion of class-conflict.

And don't forget.

As a good 9 buggy articles published between early December 2004 and late February 2005 tried to show, the US --- even in this far more moderate group of English-speaking countries --- had a unique ideological heritage.

On the left, the British, the Irish, the Australians, and New Zealanders all had socialist-inclined Labor Parties, and Canada's now dominant Liberal Party has moved in a markedly statist-direction that the Democratic Party in the US never has. On the right, paternalistic flourished in the Tory wing of the British Conservative Party, whose members originally hated the market-oriented reforms in the 1980s of Margaret Thatcher, whom they regarded as a hotheaded upstart. And while similar paternalism had trouble implanting itself in Ireland or in Britain's former Dominions overseas, there were always conservative groups and parties more suspicious of free markets than has been the case of the Republican Party here.



 



(5) Europe and Japan After 1945:
How The Advanced Welfare State and Its Crucial Political Functions Muted or Ended Then Worst of These Class-Based Conflicts and Ideological Extremism


After WWII, an intricate, tightly organized system of statist-capitalism --- crammed with bureaucratic regulations and ever rising levels of social expenditures and welfare-transfers --- emerged in both West Europe as the major means to ensure social peace and political moderation. Even Britain and Ireland, as the two previous articles in the buggy series noted, instituted a variant that lasted until the early 1980s, as did --- half way around the global --- New Zealand and Australia and for roughly the same period of time. As for Japan, recall what we've said repeatedly in this buggy series . . . including at the start of this article: its levels of government spending and welfare-transfers were carefully limited until the end of the 1980s, since which time they have surged ahead. What made Japan's state-capitalism resemble the European regulatory and welfare-state system was its even more pervasive regulatory apparatus, lavish use of subsidies, extensive cartelization of industry, extensive protection against foreign competition, and industrial targeting . . . the latter used almost exclusively since the end of the 1970s to prop up markedly uncompetitive industries of low productivity.

 

The Initial Outcome

And the new form of state-guided economy in West Europe and Japan worked as intended, not just in initially fostering economic growth and prosperity, but in a wider, more essential political and ideological way.

In particular, it ended the century-old conflict between socialism and capitalism. It also gradually modified class-tensions and conflicts that had shown up in ideological polarization and breakdown of the fragile democratic systems in Japan and most of West Europe by 1939. . After 1945, thanks to the Anglo-American liberation of West Europe and American occupation of Japan, fascism of various kinds disappeared except in Portugal, Spain, and Greece; and eventually --- thanks to growing prosperity and diminished class conflicts --- Communist parties lost their mass following too. In time, too, socialist parties in Japan and West Europe eventually renounced their full-tilt socialist commitments. Similarly, right-wing dictatorships collapsed in Spain, Portugal, and Greece in the mid-1970s, followed by their subsequent membership in the EU.

 

The Clear Lesson Here, Despite the Adverse Long-Term Outcomes

Bluntly put, an advanced welfare-and-regulatory state proved essential to the social peace and political moderation of Japan and almost all West European countries after 1945. It's still essential today.

Yes, still essential . . . even though the initial growth-potential of the EU and Japanese state-capitalist systems began to falter almost as soon as global capitalism changed radically in the late 1970s and a new long-wave of revolutionary technologies and the rapid rise of industrial rivals in Asia unleashed new gales of powerfully dislocating creative-destruction across the economic landscapes of the rich industrial countries everywhere . . . including in North America.

No need to repeat what is now familiar to you. The US, carrying out a series of deregulation, tax reforms, and eventually welfare-changes, responded quickly to the new challenges. By the mid-1990s, the major dislocations of creative-destruction had been absorbed; 75% of the Fortune 500 Companies were entirely new, products of entrepreneurial risk-taking on a huge-scale since 1975; and the rate of productivity growth --- languishing for 20 years during the turbulent restructuring and re-invention of the American economy --- leapt ahead once more. Since 1995, its annual growth-rate has averaged 3.0% . . . as good a performance as it had recorded in any decade of the 20th century. Similarly, except for Canada, all the other English-speaking countries carried out their own radical reforms, dismantling regulations and drastically reducing welfare-transfers. In the process, they too have emerged with their economies revitalized: good steady growth in GDP and per capita income and in job-creation, keeping their unemployment ratesclose to or below 5.0%.

 

Not so Japan or the Continental EU state-capitalisms.

By the time global capitalism shifted radically in several directions, their regulatory and welfare-state systems had piled up huge hillocks of market-inefficiencies . . . all disguised until then. Their faltering struggles in dealing with the forces of creative-destruction and radical economic and technical change are now too well known to you to require more comment here. When you get down to it, are there failures to restructure and revitalize their economies really surprising? In economic systems where the logic of politics trumps the logic of economics, and political calculations and maneuverings dominate market incentives and adjustments, the existing economic and social status-quo won't and can't change easily. The powerful vested interests guarding it --- in both the public and private sectors --- interact with the political system to block any reform-minded government from implementing major market-oriented reforms.

The fate of conservative governments in France, Italy, and Holland the last few years are clear reminders of the electoral punishment that will ensue for even tepid reformers on the right --- whether in national elections, local elections, or EU-referenda. It's no different for left-wing governments either. In Germany, at the start of July 2005, Chancellor Schroeder's existing level of support in public-opinion is a derisory 18%. Only Sweden and Denmark have managed to carry out some praiseworthy reforms of their regulated labor-markets. Even then, unemployment remains at close to 7.0% of the work-force in Denmark, and neither country's GDP has grown much more than an annual average of 1.5% since the start of 2001.

 

Can Market-Oriented Capitalism Be Brought to the EU or Japan?

Those in Japan and on the West European Continent who overlook the vital political and social functions of the state-capitalist systems institutionalized since 1945 --- social peace, ideological moderation, consensual politics --- and instead urge the governments there to emulate the more successful market-oriented system of the English-speaking countries are politically na´ve. No other way to say it.

Economically speaking, these critics may be right. Politically, if followed, their advice would be a disaster. Sweeping changes in these existing, tightly organized systems of state-capitalism are very unlikely to occur; and if they were attempted, social strife and probably violence and ideological polarization in many countries would most likely follow.

 

There are such critics, note quickly, even in West Europe. Last fall, the existing Dutch economics minister --- and Chairman of the EU's Competitive Council --- warned the EU Continental countries that their existing state-capitalist model was outdated and dangerous, a recipe for economic stagnation. "I will argue," he said in a public speech, " that the updated European Social Model should differ distinctly from the current one. It will inevitably resemble the US model more than is the case today".

"Since the early 1990s", said Laurens Jan Brinkhorst, the Dutch Minister, "the US has largely outpaced the EU in terms of economic growth. From 1991 to 2003, the US economy grew by no less than 47 percent in total, whereas the EU economy achieved only 28 percent growth . . . In 2003, America's GDP per capita was 55 percent higher".

"Only one member state ľ Luxembourg [population: 250,000] - could compete with most US states in terms of GDP per capita. The average person in France, Germany and Italy earns less than the average American in all but four of the US states (Arkansas, Montana, West Virginia and Mississippi) . . . And this issue is all the more pressing given Europe's ageing population, often described as the "demographic time-bomb".


As concrete reforms, the Dutch Ministers called for more flexible labour markets, far longer work-hours per year, a far higher percentage of the adult population at work again, more stimulus to innovation, lower taxes, and reforms of the regulatory apparatus.

From an economic angle, who could balk at these sweeping reforms? Politically, to repeat, it's about as likely to emerge in West Europe --- or Japan for that matter --- as the return of the Roman Empire.

 

More Specifically, To Conclude This Article, Any Radical Reforms of the State-Capitalist Countries' Economies Have To Contend With Two Wide-Ranging Political and Cultural Resistances

First, given their history, Japan and the Continental EU countries desperately needed a strong regulatory-and-welfare state economy after 1945. It was this system that finally ended 150 years of sharp class-conflicts, revolution and counter-revolution, extremist ideologies, racism, and jingoist nationalist demagogy --- it, to be more exact, plus NATO and the emerging EU in the 1950s. That system was needed then, and it is still needed. What Margaret Thatcher achieved in the 1980s in Britain --- or her equivalents abroad in stagnating Australia and New Zealand in the same decade --- can't be emulated on the West European Continent, and for reasons we'll set out later in Part IV here. Hence only reforms that maintain a much larger welfare state than in Britain, never mind here, are politically feasible in the EU . . . no matter how much a drag it might be on the pace of reform itself.

And second, few Japanese or West Europeans today would like to live in the flexible, competitive, rough-and-tumble kind of American economy and society that we have forged historically.

They wouldn't like the hard-work pressures built into it, not to mention all the uncertainties, job-changing, geographical mobility, and need for risk-taking that we almost all take for granted. They wouldn't like to go through life accepting the inevitable set-backs and defeats that require you to pick yourself up, remake your life, move if need be, and start anew without any Nanny State to help you . . . or, alternatively, tell you what to do. To the extent that there were such risk-taking people in Japan and Europe in earlier ages, most, it seems, had emigrated to the US or other New World countries by 1939. The few exceptions who remained in Europe --- Jews and some other outsiders --- were largely killed off in the Holocaust of WWII.

Since then, decades of dependency on a Nanny-State, as one of Sweden's most prominent economists (
Assar Lindbeck) put it recently, has taken its toll in personal risk-taking, entrepreneurship, the work-ethos, and an emotional acceptance of sweeping change as both inevitable and for the good. (The Lindbeck interview, linked to here, is especially informative and easy to follow. As we noted earlier in this article, he's one of Sweden's most prominent economists who, additionally, has headed some important governmental commissions to look into the problems of the Swedish economy's performance.)







Replies: 1 Comment

Greetings:

I'm curious what the source is for the figure you cited of American foreign aid, inclusive of charitable giving, being 0.68% of GDP. It would be a great help to me if you could let me know what the source is for that, especially if it were in linkable form. Thanks.

Keep up the great stuff. If I have one criticism, though, it is that there is a bit much re-citing of stuff from earlier posts. Rather than repeat your arguments in each part, I suggest simply providing the links for people to follow back to earlier "Parts" and diving forward.

Posted by Porphyrogenitus @ 08/14/2005 03:14 PM PST