The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

WINNING POLICY BATTLES BUT LOSING THE WAR AGAINST ECONOMIC REALITIES*

When the economic history of Europe in the last third of the twentieth century comes to be written, one of its most important threads will tell of the long series of battles in which governments fought against economic realities in order to satisfy the wishes and pander to the illusions of electoral majorities. The period is one where government spending expanded relentlessly from under 40 to over 50 percent of gross national product in the largest countries of continental Europe. (Last year, it reached 53.6 percent in France, provoking solemn promises by the powers-that-be that this time they will really start controlling spending and bring it down to 51 percent by 2010.) Piece by intricate piece, the machinery of the welfare state was put together. An ever more elaborate system of “workers’ rights” was promoted until the labor code grew to several thousand pages—a happy hunting ground for labor lawyers, a minefield for enterprises. Trade union power came to be based, not on workers recognizing that union membership may serve their interests, but on legislation, government sponsorship, and the patronage afforded by the immense administrative machinery of the various social insurance schemes.

The forward march of politics across the domain of economics was widely accepted as justified, mainly for two reasons. One, expressed in such mantras as “Man matters more than the market” or “In democracy, it is ballots that decide, not dollars,” was based on the delusion that markets and dollars have one will, man another, and the two pull in opposite directions. The other reason for welcoming the invasion of government into the economy was, and remains, the conviction that redistribution of income through taxation and targeted expenditure is an act of “social justice,” a good deed and a moral duty.

“THEY DO NOT TALK BACK”

The future historian of these apparent triumphs over economic reality will very likely single out two phenomena that loomed more and more ominously and in fact began to signal that no matter how the battles went, the war was beginning to be lost. One was the growing severity of job protection policies that made firing employees so difficult and expensive that employers were frightened away from hiring them in the first place. New job creation fell to levels last seen in the Great Depression, for offering employment except on short-term contracts has become an act of reckless audacity. (One small but significant breach in job protection came just the other day when the highest French court of appeal ruled that terminating employees may be permitted not only when the enterprise is making losses threatening its survival, but also when terminating employees is necessary to prevent such losses.)

The other ominous phenomenon was that the high level of unemployment, which would have seemed abnormal a decade ago, has come to be seen as a fact of life. It has resisted the multitude of attempted therapies governments of both Right and Left tried to apply to it. The diminishing band of diehard defenders of the “European social model” still mutter that unemployment is high because the model is not “social” enough, or not European enough, and all will be well when it is made more social and more “harmoniously” European. Meanwhile, it is starting to be noticed that chronically high unemployment has almost wholly drained away the bargaining power of labor in the private sector. Union militancy is now confined to the public sector—essentially, to public transport workers, teachers, and government clerks. Thirty-odd years of socialist economic policies have reduced the mythical, red-flag-waving “working class” to passive impotence.

An anecdote bears eloquent witness to how workers “benefiting” from the “special model” now stand compared to those who are exposed to the “caprice of the market.” Two years ago Toyota set up a car assembly plant in the industrially derelict region of northeast France. More recently, the president of Toyota visited the plant, expressed his satisfaction, and explained that the company has chosen to locate in France rather than in England (which was the runner-up candidate location) because “English workers can afford to talk back, but French workers cannot.”

In fact, under the “European social model” real bargaining has practically ceased. Labor addresses its demands not to the employer, but to the government that may or may not be able to bully the employer into making concessions. Increasingly, the latter is unable to achieve much in the face of the risk that capital and operations will be moved out to central and eastern Europe, Asia, or Mexico. In actual fact, the volume of such movements is fairly modest, but their public echo is deafening and wreaks havoc in politics and the labor movement.

DISCREETLY, BACK TO BASICS

In current labor union language, bargaining hardly exists. In its place have come “meaningful negotiation” in which the employer meets union demands, and “blackmail” in which the employer obtains concessions.

Over the past year, there have been a number of high-profile cases of “blackmail” by European, chiefly German, flagship companies including Siemens, Opel, Bosch, Conti Gummi, and Volkswagen, usually involving the lengthening of the work week and in some cases lower pay for new recruits, in exchange for commitments by the employer not to reduce the labor force or limiting the reduction to a minimum, as well as undertakings not to move production abroad. These cases obviously had a bad press and made much political noise. Unions agreed to them under protest, stressing that the cases were exceptional, involving a small fraction of wage-earners, while for the vast majority industrywide collective contracts remained in force.

In the meantime, there was a mostly unreported groundswell of “blackmail” agreements between small and medium enterprises and their employees that departed from the official industry contracts. They involved longer hours, more flexible working arrangements, wage freezes, or lower pay increases than the industry norm. They were concluded between the enterprise and the works council, whose members were labor union officials who forbore from wearing their union hats. According to some estimates by industry associations, between 50 and 70 percent of enterprises with fewer than five hundred employees have concluded such agreements. Their cardinal feature was a promise of maximum discretion, so as to let labor organizations lose as little face as possible. Apparently, there was little opposition by the wage-earners themselves. Manifestly, there is more understanding and acceptance of realities in Germany than in France and Italy, where labor and the parties of the Left still seem to believe that the basic facts of life can be made to go away if you call them “unacceptable” loud enough.

In 2000, German labor costs were about 25 percent higher than French ones. By last year, the gap had practically disappeared. German forward economic indicators have been perking up since last spring, and unemployment has started to fall significantly even before the “Merkel effect” has come into play. It will be interesting to watch how the other “core” countries of the euro-zone will position themselves over the next year or two. Will they go on winning the policy battles and lose the war, or will they permit a gradual and discreet return to basics?

[* ]First published by Liberty Fund, Inc., at www.econlib.org on February 6, 2006. Reprinted by permission.