An excellent book appeared on my doorstep yesterday, by Barry Eichengreen:
Thus Europe, which had relied on extensive growth in the 1950s and 1960s, had no choice but to switch to intensive growth from the 1970s on. The problem was that institutions tailored to the needs of extensive growth were less suited to the challenges of intensive growth. Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty. Now the role of finance was to take bets on competing technologies, something for which financial markets were better adapted. The generous employment protections and heavy welfare-state charges that had given labor the security to accept the installation of mass-production technologies now became an obstacle to growth as new firms seeking to explore the viability of unfamiliar technologies became the agents of job creation and productivity improvement. Systems of worker co-determination, in which union representatives occupied seats on big firms’ supervisory boards, had been ideal for helping labor to verify that owners were investing the profits resulting from its wage restraint but now discouraged bosses from taking the tough measures needed to restructure in preparation for the adoption of radical new technologies. State holding companies that had been engines of investment and technical progress were no longer efficient mechanisms for allocating resources in this new era of heightened technological uncertainty. They were increasingly captured by special interests and used to bail out loss-making firms and prop up declining industries.
I have never read a better paragraph on what the European economies have done right and subsequently did wrong. Note that Eichengreen is, broadly, a social democrat. Eichengreen (who is more optimistic about Europe than I am) believes that Europe can turn things around, without chucking the basic model, but he doesn’t for a moment deny that Europe faces an economic crisis relative to the American model.
I am still shocked by the response of the CrookedTimber commentators to my short essay on social democracy over there. It is not just a question of how one reads the productivity and growth numbers, but also there is a commonly accepted narrative of what is wrong with the major European economies. Eichengreen is the one doing service to the social democratic cause.