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 *

SOME BAD NEWS COULD BE GOOD NEWS*

The bad news is that despite the harsh experience of the last decade or more that should have brought home the damage done by socialist tinkering, there is still no electoral majority for a more liberal economy in “core” Europe. Crucial elections in Germany last September were supposed to sweep away the social-democratic government and install in its place the alliance of conservatives and liberals whose program openly aimed at cutting the overblown welfare state down to size and at tackling unemployment by doing away with the more absurd features of the prevailing “job protection” laws. Instead of winning the comfortable majority predicted by the polls, the center-right alliance failed to gain control of the legislature. The social democrats, the “greens,” and the hard left, though by no means united, could and assuredly would defeat any radical reform proposal. Mathematically, the only issue was a coalition government of the center-right with the center-left, capable only of uneasy compromises and half measures, and bound to preserve the essentials of the “social protection” that the electorate insisted on maintaining.

All this had a profound knock-on effect in France. The French left is leaderless, has no program, and is in disarray. The right has the majority by a wide margin. However, the right is internally divided into a mainstream and a radical reformist part. The mainstream wants to continue the postwar tradition of an anti-“Anglo-Saxon” ideology and of “social” appeasement at almost any cost. It is led by a second-term president who, contrary to his high-profile postures in foreign policy, in domestic policy never faced down a strike and never failed to give way to noisy street demonstrations. Interest groups have duly learned the lesson and have become more intransigent and menacing than their intrinsic strength would normally permit. Despite the overt and covert government subsidies meant both to strengthen and to buy them off, French labor unions are intrinsically feeble, with a total membership of less than 8 percent of the labor force, but behave as if they held all real power in the land.

Until recently, the reformist wing of the French Right looked highly likely to defeat the mainstream at the next presidential and parliamentary elections in April 2007. The result of the German elections caused all calculations to be remade and all positions to be shifted leftward. “A liberal economic program is the surest way to lose the election” has become the received wisdom.

If this wisdom is in fact true, it has a drastically simple explanation. The “average” voter, frightened by the chronic 10-11 percent unemployment rate, is desperately clinging to the system of “social protection” that prevails in Germany and France. He stubbornly refuses to see that it is the very system of “social protection” that is the main cause of unemployment.

The good news lurking behind these bad ones is that it is never possible altogether to outlaw and smother the adjustment process by which an economy pushed off balance by shocks and extraeconomic constraints, seeks to right itself. If cowardly politics shuts down one corrective mechanism, another will start up. The result will not always be as smooth or efficient as if the first, most obvious, mechanism had been allowed to work, but adjustment will still take place, albeit in roundabout and costlier ways. The Soviet Union had banned profit-and-loss and frozen the price system. In their place, much of the work of resource allocation shifted to queues, black and gray markets, and the sort of corruption that spreads when direct ownership interest is suppressed or overlaid by principal-agent relations.

With all adjustment mechanisms intact, unemployment depresses wages, which in turn stimulates rehiring. As capital’s appetite for hiring labor increases, investment using standard technology to create work-places expands. Expansion continues till the demand for labor lifts wages sufficiently to arrest the process. Throughout, there is a sort of pendulum movement between the share of profits and the share of wages in national income. More appetite on the part of capital to hire labor boosts the share of wages and reduces the share of capital—as used to be the case in the 1960s and ’70s when employment was still near to full.

What happens instead in the Franco-German welfare state “model” of today? Companies do not hire, because under “job protection” laws they may not be able to fire should it become advisable to shed labor. It is extremely difficult to reduce wages or tighten working conditions; indeed, there is pressure from the government and the media to do the opposite. Everybody would like to cut costs by shedding labor when this is feasible. German companies now manage to do it, but the cost is fearful; Daimler Benz is providing 960 million euros to fund the cost of letting go 8,500 workers from its plants in Baden-Württemberg. In France, even high severance payments may not permit payrolls to be cut. Hewlett Packard intended to reduce its work force in Grenoble by 1,250 persons, mostly by natural wastage over two years. Because the company was profitable in its worldwide operations, there was outrage at this manifestation of ruthless and shameless greed. President Chirac called upon the European Union to intervene, there was a barrage of accusations against the management, and Hewlett Packard eventually back-pedalled some of the way. The example can only encourage other companies to shed labor when they can get away with it at an affordable cost, and in any case not to create new jobs.

However, there are exceptions and they also tell a tale. Toyota did create several thousand new jobs in northeast France. Its president is reported to have said that he chose this location in preference to England because English workers do not fear for their jobs and will “talk back,” while French ones are so intimidated by the surrounding unemployment that they are easier to handle. Unions are highly aggressive in the public sector but hardly ever strike in private industry.

Despite such exceptions, the overall tendency is to refrain from hiring and fire (or “delocate” to eastern Europe, India, or China) when one can get away with it. Manufacturing employment is now 22.5 percent of the total in Germany and 15 percent in France, still way above the American and British figure of 10 percent, but falling. Investment has a strong labor-saving bias as companies are reaching out for new technologies. Instead of “widening” it, the stock of equipment is being “deepened.” As the nineteenth-century Austrian economist Böhm-Bawerk would have put it, the “period of production” is lengthening (without necessarily taking more time).

The irony is that to relieve unemployment, it is precisely “widening” and not “deepening” that would be needed. It is “widening” that the normal corrective mechanism of falling wages and the ensuing demand for labor would have produced.

What the roundabout adjustment mechanism permitted by the counterproductive policies of the Franco-German “social model” is bringing about is bad for employment and bad for wages in the short term. In the long term, however, it may prove to have been a great leap forward. Sooner and faster than would have been normal, it forced the “core” European economies to adopt technologies appropriate for tomorrow’s economies that are short of labor—an unexpected achievement for countries suffering from double-digit unemployment. It greatly accelerated their exit from traditional manufacturing industries and their transformation into service economies along much-maligned Anglo-American lines—another unexpected by-product of the European “social model.” Whether lagging growth, unemployment, and rising national indebtedness are prices worth paying for this result is of course an open question, but at least these prices are not being paid only to keep up the futile illusion of “social protection.”

[* ]First published by Liberty Fund, Inc., at www.econlib.org on November 7, 2005. Reprinted by permission.