Umair Haque / Bubblegeneration
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Saturday, March 11, 2006


The Big Picture

Decadent Europe

Paris protest recalls '68 riots


Public sector strikes hit Germany


Europe, the immovable object meets Economics, the irresistable force.

This is just so retarded : how can a country be possibly brought to a standstill over a measly 1.5 hour increase in the work week or a slightly less insane policy on job security? The world moved on from 40 hour work weeks and job security long time ago.

One possible reason for these events is the anti-entrepreneurialism of Europe. The kind of participative capitalism prevalent in North America - and, increasingly, in Asia - that allows employees to reap significant rewards of business success does not seem to have evolved in Europe. There are many distinctive attributes of a culture that enables wealth-creating capitalist eco-systems like the Valley, Shanghai or Bangalore, and Europe sadly lacks most of them. Some of them include openness to new ideas, a business-friendly regulatory environment, social attitude towards risk-taking and failures, non-punitive tax regimes, value for individual capabilities regardless of their ethno-religious-educational-economic background and, above everything else, an incentive structure that motivates employees by getting part of the rewards for business success. For example, it's very common for Silicon Valley start-ups to set aside 20-30% of their stock for employee options and purchase plans. Similarly, employees in Indian tech companies experience a significant rise in their purchasing power due to high and growing wages, and a lot of perks that almost verge on pampering. This results in employees having a significant stake in the success of business leading to a reduced potential for conflict between maangement and employees, and increased flexiblilty in responding to changes in the environment : it's not uncommon for techies in California or Bangalore to pull all-nighters to meet pressing deadlines. But the employees understand how critical those deadlines are and work with their managers to make the business successful. Successful businesses, in turn, create rich employees who then become the feedstock for the next generation of entrepreneurs - and the innovation machine merrily continues to chug along.

The last point is lost upon many people, but it's key to understanding the formation and sustenance of innovation clusters. Rich employees in entrepreneurial societies create a deep reserve of risk-taking capacity at the societal level, which adds to that society's competitive advantage. For example, I have seen many people who got rich off IPOs or acquisitions as employees and then quit their jobs to work on their new project, some which turned into successful businesses. Many others became angel investors or participated in venture funds, which further adds to the availability of risk capital at the grass roots level. They could not have taken these risks unless they had become financially secure at a sufficiently young age. The existence of such smart and deep pools of risk capital controlled by people educated in the school of hard knocks is key to attracting the best talent from around the world in the open and freewheeling culture of these clusters who then continue to obsessivley work on the new new thing and make even more money. Here's an example that i recently came across: Gautam Godhwani.

To use my MBA jargon, this is the key competence that North Ameerica possesses today, and one that Asia is quickly developling. I am not using the word competence lightly here : it is a rare, inimitable and valuable capability that is deeply rooted in culture and not easily replicable. Therefore, this competence is a competitive advantage for US, Canada & UK to a certain degree, and will become one for India and China as they increasingly unleash their entrepreneurial energy in the global market. You can see a lot more detailed research on this in Michael Porter's work on the formation of innovation clusters.

Europe, on the other hand, appears to be much more of an oligarchy with the old guard using capital merely as a means to buy labour without seeing it as participants in wealth-creation. The workers then return the favour in-kind, framing their relationship with the business owners through the retarded Marxist framework of class struggle and bargaining to maximize the most money they can get with the least effort.

This makes me think that Europe, on the whole, appears to be unprepared for the age of the Knowledge Worker who is a co-creator of wealth although there are a few pockets of innovation in certain industries such as mobile communications and software. But, the model is very different : it's either dumb and risk-averse Big Government money or it's led by R&D labs in large corporations such as Nokia. On the whole, Europe seems to be less capable of creating innovation clusters in new industries by grass-roots entrepreneurship and a whole lot of energetic start-ups.

Why is this the case? My hypothesis is that the socialist, anti-immigrant, and anti-entrepreneurial culture of Europe is perhaps responsible for this. I keep thinking about an interesting thought experiment to explore this hypothesis : what would happen if we were to magically transport many of these French and German workers to toil away at start-ups in California or Bangalore? Would their world-view change? Certainly, many people choose to work less to enjoy more personal time. However, there is a trade-off here, and if work itself can provide personal fulfillment or opportunity to reap large financial rewards, wouldn't it fundamentally alter how they think of work? In other words, wouldn't changing the incentives for workers replace their attitude from seeing work as drudgery that only serves to fill the owner's coffers be replaced with the attitude of working hard and taking high risks to reap high rewards?

More than anything else, I am left utterly perplexed by the philosophical undercurrents of events in Europe : have the French and German policy makers utterly diswoned the Austrian School? To see the land that was once home to giants of economic thought such as Bastiat, Mill, Hayek and Von Mises turn into a sorry spectacle of its former self would be funny, if it weren't so tragic for the economic well-being of its citizens. Optimists may hope that the current decline of Europe into economic Dark Ages will give birth to the next Renaisaance. Pessimists might see the end of the European Millennium as setting the stage for the US, and possibly India and China, to stake a claim on this millenium.

-- Mahashunyam // 6:33 PM // 14 comments


Comments:

To use the word "Europe" when you are discussing the problems of the French, the Germans and their ilk is to ignore the completely different work ethic, entrepreneurial culture and innovation of the rest of Europe.

The UK, Ireland, Iceland, Denmark, Norway, Sweden, Finland and the Eastern European countries (which have a strong economic connection to the Nordic Countries) have populations with starkly different attitudes towards new enterprises than the French or the Germans.

Anybody who has been following the economy and investments coming out of the Nordic Countries over the last ten years would know that there is a lot more to Europe than the continued stagnation of countries whose last claim to fame was duking it out in the second world war.
// Anonymous Baldur // 11:02 PM
 

That's a good point, Baldur. As I mentioned in my earlierpost on Europe, I do consider the UK to be significantly different from EU for the purposes of econmoic analysis, and I sort of take it for granted that it's self-explanatory. The reality is that Germany and France are still the two largest economies, with Germany being even larger than the UK. Together, they weild significant influence in economic policy-making at the EU level. They are also the two largest markets for the EU, and therefore their economic cultures are critical to the rest of EU, as well as the world. For example, if the Polish Plumber is the new economic bogeyman in France, that affects EU's policy on internal labour market development. If France talks about economic patriotism then that will affect the EU's competition policy.

Having said that, I must admit that I don't know nearly enough about the state of innovation in Nordic economies, beyond a vague notion of advances in mobile telephony with Nokia and Ericsson with an occasional Skype thrown into the mix. I would love to be educated about what's happening there. I request all readers to share cool examples of entrepreneurship and innovation in Nordic countries as well as the rest of Europe.
// Blogger Mahashunyam // 12:07 AM
 

von Mises
// Blogger Jack DeNeut // 1:23 AM
 

Well, Opera and Trolltech come to mind, based as they are in Norway. They do cool software.

Then for example you have Sigurj�n Sighvatssons BigTV a TV station he's started in finland that applied quite a few of the current buzzwords in the media industry to broadcasting ("user-generated content", web-availability of programming, etc).

I do agree, however, that the continued influence of France and Germany over EU economic policy is a liability. One that has been seriously plagueing us for a long time now. But there are over forty countries in Europe and only 25 in the EU. To attribute the brain-damage of two onto the other forty is a serious miscalculation at best.

We live with the negative influence of France and Germany, to be sure, but there is a lot more to Europe than those two nations. I'd even say that there is more to Europe than just the EU.

I'm not saying that we're about to take over the world like India or China, but we'll still be somewhere in the race.

Although it's amazing to see how united people think Europe is given how much we enjoy arguing with each other :-)
// Anonymous Baldur // 1:42 AM
 

As someone who lives in another European country (Ireland)which is a member of the EU, I find this kind of sweeping generalisation deeply annoying. The culture in this European country and in other countries in Europe is very much pro entrepreneur.

And like it or not, for the purposes of economic analysis, the UK, Ireland the Nordic countries and others are part of Europe even if they don't fit your thesis.
// Anonymous liam // 6:48 PM
 

Hmmm. Compare Wired raving about France in the late 90s.

http://www.wired.com/wired/archive/8.06/paris_pr.html
// Blogger phil jones // 7:58 PM
 

Thank you, Liam : your comment made me think a little harder about my thesis, so I pulled up some OECD stats:

http://www.oecd.org/dataoecd/8/4/1874420.pdf

Here's PPP GDP numbers in USD bln:
1.France : 1749
2.Germany : 2283
3.Denmark: 166
4.finland : 149
5.Norway: 169
6.Sweden: 260
7.Spain: 1052
8.Italy: 1549
9.Ireland: 133

Not to put too fine a point on it, but you can see that all Nordic countries and Ireland put together don't even add up to Spain's GDP. Nokia's market cap of $89B alone accounts for more than half of the GDP of Finland! For that matter, even the Chech Republic has a higher GDP than Denmark. The reality is that in the global economic game, a trillion dollar economy is just the table stakes: you don't even count as a player otherwise. The global business impact of Nordic and Irish economies is quite limited, particularly when you consider how much of their foreign trade is intra-EU vs. outside.

Perhaps a valid comparison for Ireland or Sweden in economic terms may be a small or mid-sized US state such as Oregon or Colorado. However, when we are talking about global economic analysis, we must perforce look at what's happening in the Big 5, trillion dollar plus, economies in Europe, i.e., Germany, UK, France, Italy and Spain. The UK, as I mentioned earlier, is an exception for reasons I outlined earlier that I am not going to reiterate here while based on what I know about Italy and Spain I think my thesis is reasonably applicable to their economic conditions as well. Therefore, although my thesis sweeps over some of the regional cultural differences in the EU, the analysis on the whole still stands.
// Blogger Mahashunyam // 8:24 PM
 

Wow, I'm not even sure where to begin. Just for starters...

You portray North American capitalism as "participative" and that it allows "employees to reap significant rewards of business success."

However "The net worth of the typical family in the richest 10% rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family in the bottom 25% fell 1.5% to $13,300." (http://tinyurl.com/hgr39)

That doesn't sound like employees are reaping many rewards to me.

And this map (http://tinyurl.com/rrmyr) shows just how geographically concentrated the reward reaping really is, while this map (http://tinyurl.com/qouxo) shows where the action really is taking place.

Then you mention Silicon Valley, Shanghai and Bangalore as having the cultural attributes of a wealth-creating eco-system. Then you go to describe such attributes, most of which are the antithesis of Chinese and Indian government and culture (China open to new ideas? Only if they've been blessed from on high. And India blind to ethno-religious-educational-economic backgrounds? Perhaps this may be partially true in the culturally anomalous US-style high-tech campuses that are completely isolated from the rest of Indian life. And even then women still aren't exactly encouraged to participate (http://tinyurl.com/q4kh5)).

"Successful businesses, in turn, create rich employees who then become the feedstock for the next generation of entrepreneurs." What data supports this? The bulk of American families' net worth growth has come from the housing bubble (which may of may not burst soon depending on who you ask). And most of the growth is being eaten by inflation (actually inflation rather than the happy aggregate number the government likes to quote).

"Europe, on the other hand, appears to be much more of an oligarchy." More than China? More than India? A recent RadioEconomics podcast seems to disagree (http://tinyurl.com/fq4rx).

Sorry this is so scattered, but there is just so much to argue with here it all wants to come out at once.
// Anonymous niblettes // 10:18 PM
 

Follow-up in direct contradiction of one of your primary claims:

"The median household income rose just 1.6% between 2001 and 2004 (from $42,500 to $43,200 in 2004 dollars) compared to an 11.7% rise in productivity. Simply put, workers aren�t reaping the rewards of their labor: real wages are trailing productivity gains because profits are taking the lion�s share of economic growth."

- From the Economic Policy Institute (http://tinyurl.com/hfqyt)
// Anonymous niblettes // 7:54 PM
 


You use a lot of nice words but you forget about the right to live with dignity. Many people have not a chance to even be part of whatever entrepreneurial culture you are talking about. That super competitive system creates lots of poverty. Don't loose yourself in a bubble , partecipate to real life, watch,understand what is going on and respect your less fortunate fellows that have to scrape the bottom to live. There is still plenty of those in Europe and definitely lots in the USA.
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