The Online Library of Liberty

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• 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 *

THERE IS NO FRENCH EXCEPTION*

For a country whose political elite is singularly impervious to economics, and much of whose public viscerally loathes capitalism and liberalism as “Anglo-Saxon” perversions, France has made uncharacteristic progress these past few years toward accepting the way the world works. But for all this progress, certain fundamentals remain intact. Intact above all is the compulsion to believe and assert that France is different, a brilliant exception.

Such convictions were evident in Prime Minister Lionel Jospin’s address last week to the congress of world socialist leaders. Mr. Jospin distanced himself from his British and German colleagues who would dilute socialism by modernizing it. He conceded that the “market economy” is a superior instrument of wealth creation. But, he said, the market is mindless, blind, it lurches along without knowing where it is going. Politics must regulate it, give it a firm direction for the common good. Such ideas reflect the fallacy, so alluring to the economically semiliterate, that the production and distribution of wealth are separate and independent of each other.

FORTUITOUS TRENDS

Recent economic trends—growth along with a rapid expansion of the welfare state—are only reinforcing the belief in French exceptionalism. During the presidencies of Valéry Giscard d’Estaing and François Mitterrand, the headlong extension of the French welfare state went hand in hand with ever more sluggish economic growth. France moved near the head of the European unemployment and taxation leagues. Some socialist intellectuals even began openly to say that unemployment is the price the country had to pay for social justice, a price it mitigated by looking after its jobless. The “Anglo-Saxon,” “neo” or “ultra” liberal model, by contrast, buys higher growth and lower unemployment at the price of latent inequality and insecurity.

But coinciding with the advent of Lionel Jospin’s coalition government of Socialists, Communists, and Greens, the tide started to turn in 1997. Though the share of national product preempted by public spending stayed at about one-half—one of the highest levels in the world—economic growth accelerated to about 2.5 percent per year from near zero, and the jobless rate, as measured in the official statistics, declined slightly to 11.2 percent from 12.6 percent. This took place while the welfare state was further extended by such measures as the guaranteed minimum income—in sharp contrast to the attempts of Britain, Germany, and Italy to curb the excesses in welfare provision that accumulated over the past three decades. Perhaps, it seemed, the exception Française would turn out to be more than just self-flattery.

Privately, even some left-leaning French experts recognize that a rising tide lifts every boat. But as the French economy rides a general upswing in Europe, the government is piling ever more ballast onto French enterprise. The heaviest ballast is undoubtedly the reduction of the workweek to 35 from 39 hours, tantamount to an increase of some 11 percent in wage costs. Though partly offset by side-agreements allowing more flexibility in the workplace, and partly financed by government assistance, this increase can only reduce employment below what it would otherwise be. Only in France can it seriously be argued that it would actually increase employment.

Perhaps less headline-catching than the 35-hour week is the rising pitch of anticapitalist discourse in both government circles and the media, excited by the spectacle of large stock-market gains and Anglo-American style takeover battles. The market can be suffered to create wealth, but only tamely, without the gainers gaining too much and without anyone being the loser. This schoolmasterly stance reaches beyond mere words into the regulation of the daily business of life, sometimes in grotesque forms.

Recently a large dairy farmers’ cooperative in northern France applied for permission to lay off seventy-eight workers in one of its processing units. From the government inspector of labor relations, the matter went to the industrial court of Amiens, which refused permission on the ground that the layoffs were designed not just to safeguard competitiveness, but actually to enhance it—improving financial performance at the expense of employment. The judgment has been appealed, but whichever way the case eventually goes, it and similar judgments reflect the deeply ingrained French conviction that enterprises exist for their employees and letting enterprises make profits is at best a grudging concession to an ugly world that we must strive to change.

Firms are expected to hire but are not free to fire. Neighboring Spain realized a few years ago that if firing is made too difficult, firms will shy away from the risk of hiring, and even the Spanish labor unions supported the abolition of these controls—with gratifying results for all. France still seems to believe that the way to increase employment is to permit additions but prohibit subtractions, and that dividing the available amount of work among more people by having each work shorter hours is the mathematically surest recipe of all.

Yet France is being menaced by threats that look mundane, but against which there is ultimately no defense. They will, in due course, wrench the control of events from the Socialist leadership and prove that after all you cannot have it both ways.

One, simple and inexorable, is tax competition that is gradually depriving the government of means commensurate with its ambitions. At the present levels of taxation and regulation, there is already a serious drain of capital, brains, and enterprising spirit from France to other countries. Repeated French attempts to build a high-tax cartel by imposing tax harmonization within the European Union have so far largely failed, are likely to go on failing, and would not fully stop the flight of capital and talent from France even if they succeeded.

The other threat is posed by France’s increasingly untenable public-pension system. Like every other Western country and Japan, the French are sitting on a demographic time bomb due to a changing balance between the active and the retired population. By 2005, the squeeze will start in earnest, as there are fewer working citizens to support a burgeoning population of retirees. But the French pension system, which like Social Security in the U.S. is a pay-as-you-go scheme, is headed for insolvency. Worse still, France has virtually no supplementary funded retirement schemes that accumulate capital in pension funds.

The radical remedy is an initially painful switch from pay-as-you-go to funded pensions, a switch that Chile performed with resounding success a decade ago. In France, however, such a switch is as good as unthinkable. Pay-as-you-go is a French Socialist ideal, the expression of solidarity between generations and a liberation of the old from the servitudes of saving and scraping to avert misery. The French labor unions, too, have an unshakable vested interest in it, for they run the system and obtain great powers of patronage from it. The government knows that the time bomb is ticking. The Charpin report, which it commissioned, recently confirmed this. Mr. Jospin met the dilemma by confidently declaring that it was not as grave as all that.

ADDING INSULT TO INJURY

Ironically, the French socialist government is not only losing control over its “model” because the country does not have and does not want private pension funds. It is also losing control because other countries do want and have them. Between a third and two-fifths of the hundred largest listed French enterprises are owned by nonresident investors, primarily American, British, and other foreign pension funds. This is adding insult to injury. Not only are these investors the hated pension funds, but they are also “Anglo-Saxon.”

What’s more, many of them are abandoning their traditional passivity and are now starting to exert an influence on the management of the French companies whose stock they hold. French managers who used to run to the Ministry of Finance and Industry for approval of some major corporate move now run to Wall Street and the City of London to solicit the favor of investment institutions. This is both a blow to French pride and a serious obstacle to running the country the Socialist way. Yet France cannot afford to buy back its blue-chip corporations, cannot chase off foreign investors, and cannot expropriate them without making itself into a pariah state.

The question thus arises: Will anyone think, in a few years’ time, that the French can have it both ways?

[* ]First published in the Wall Street Journal Europe, November 15, 1999. Reprinted by permission.