Arnold Kling  

Nobel Laureate Phelps Speaks

I Distrust Robert Putnam... What Do You Want to Be Free to...

Rather, he writes a provocative, important piece in today's Opinion Journal (via the Wall Street Journal).

There are two economic systems in the West. Several nations -- including the U.S., Canada and the U.K. -- have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development.

...The other system -- in Western Continental Europe -- though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks...The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks...So different is this system that it has its own name: the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy.

...I conclude that capitalism is justified -- normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

Read the whole thing. If you do not have a subscription, then it's worth buying today's paper.

I think that parts of the U.S. economy resemble Europe's. In particular, insurance is so highly regulated that it lacks the dynamism of the rest of the economy. The Massachusetts health plan is an extreme example of a system that preserves private ownership but otherwise reflects socialism.

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COMMENTS (9 to date)
DRDR writes:

No need to buy a paper, the editorial is free today on Opinion Journal.

[Thanks. I've modified the original post to include both WSJ links: Opinion Journal and subscription.--Econlib. Ed.]

Bill Millan writes:

Here is the link:

jb writes:

specific link:

This was a great article. I've been saying the same thing (not as eloquently, or with as much gravitas) as he did.

I'm intrigued to see how my favorite liberal - Matt Yglesias - will respond.

Randy writes:

From the article;

"A tremendous confusion is created by associating "capitalism" with entrenched wealth and power."

Very good point.

Phelps might have used the Airbus fiasco as an example of the corporatist-Continental model and its current problems.

Mr. Econotarian writes:

I don't know if I agree with the article's premise.

While there certainly is a lot of "co-determination" in Europe's largest companies, the smaller ones don't have it, and it is very unclear if innovation is stifled in either situation.

What is clear is that Continental Europe has a great deal of labor market regulation that keep less productive people from participating in the labor market at all. The unemployed are then supported by the state through labor taxes on the working (which in itself reduces the labor supply).

The result is double the unemployment and half the economic growth of the "Anglo-Saxon" system. But I don't see too many Europeans complaining.

Perhaps as the average living standards between Continental Europe and the Anglo-Saxon model countries grow, there will be enhanced concern by Europe to reform.

Grzesiek writes:

"What is clear is that Continental Europe has a great deal of labor market regulation that keep less productive people from participating in the labor market at all."

Continental Europe has a great deal of labor market regulation that make it difficult (indefinite contracts) to be removed from the ranks of the employed.

All very interesting considering that the article cites that Continental Europe's productivity and job satisfaction are lower than those of the workers in the United States.

jaim klein writes:

What Phelps is saying is conventional wisdom but see how Germany has left the USA behind as the world largest exporter of goods and is a leader in engineering innovations.

Kevin Nowell writes:

What does being the world's largest exporter of goods have to do with anything? Surely you aren't positing that being a net exporter is correlated with having a healthy economy?

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