NCPA - National Center for Policy Analysis


January 27, 2010

It makes no sense to regard the crisis of the American economic system as reason to glorify Europe's social welfare system, with its ghastly faults, or to see the latter system as a way out of decline, says Edmund S. Phelps, director of the Center on Capitalism and Society at Columbia University and the winner of the 2006 Nobel Prize in Economics. 

Europe has been a distant second to the United States in dreaming up, developing, marketing and embracing new commercial products.  The reason is not bad luck.  Europe is lacking in economic dynamism -- in systematically cultivating and facilitating innovation.  This is evident by any measure, says Phelps: 

  • Venture capital investment in Europe is less than half the U.S. level.
  • There are few start-ups in Europe -- no Microsoft, Netscape or Google.
  • In European countries the same old companies remain in the top 20 from decade to decade. 

Some economic indicators convey the costs of this deficiency, says Phelps: 

  • Young people still leave Europe in droves to make their careers.
  • Reported job satisfaction and employee engagement are far lower in France and Italy than in Canada and the United States.
  • Suicide rates are relatively high in some European countries. 

The corporatist strategy of inserting the state in place of private initiative and creativity has never worked -- from Mussolini onward.  In addition, social indicators point to moral failings in Europe, says Phelps: 

  • Except in the very homogeneous nations, we see stark failures to bring about economic inclusion -- from Naples to Marseilles to Amsterdam.
  • Kids growing up in slums have slim chances of having a good tertiary education and a rewarding career. 

Sustained escape from decline will require a return to high dynamism and that will require bringing back old-fashioned banks that lend to business and old-fashioned companies that are forward-looking and courageous.  A rehabilitated capitalism is the only vehicle that will get Americans there, says Phelps. 

Source: Edmund S. Phelps, "Don't Look to Europe, The U.S Needs Rehab Capitalism," CNBC, January 26, 2010. 

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