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Nobel Prize Winner Compares the Economic System in the U.S. and in Germany

Edmund S. Phelps, Professor of Political Economy at Columbia, was awarded the 2006 Nobel Prize for economics on Monday and published the interesting article "Dynamic Capitalism: Entrepreneurship is lucrative--and just" in the Wall Street Journal (free!) on Tuesday (HT: Moderate Voice). The first two paragraphs:
There are two economic systems in the West. Several nations--including the U.S., Canada and the U.K.--have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations. This is free enterprise, aka capitalism.
The other system--in Western Continental Europe--though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks. Since World War II, a great deal of liberalization has taken place. But new corporatist institutions have sprung up: Co-determination (cogestion, or Mitbestimmung) has brought "worker councils" (Betriebsrat); and in Germany, a union representative sits on the investment committee of corporations. The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks. What it lacks in flexibility it tries to compensate for with technological sophistication. So different is this system that it has its own name: the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy.
A few related posts in Atlantic Review:
The American Dream and the Future of Employment,
Germany's Economic Importance for the US -- Economic Reform and Poverty,
Germany has become more attractive to U.S. investors and
• Germany in danger of "Americanization" without the good points.


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David on :

Very interesting essay; thanks for posting. For an alternative viewpoint, I can recommend a piece by Prof. Werner Abelshauser of the Uni Bielefeld: "The German Innovation Machine: Dead or Alive" , available online (pdf) at He points to the highly innovative economies of Scandinavia (esp. Finland) as a different model.

joe on :

Social justice always comes with a price. This seems to be a minor one given the benifits.

Don on :

Social Justice, joe? Perhaps we ought to ask the German Turks about 'social justice'. We don't have to ask the Arabs in the banilieus (carbque) neighborhoods outside Paris, Lyons, Leige, Strasborg. They weighed in with their opinions on social justice in France this time last year. Very graphically too.

Zyme on :

@ Don The french culture itself is affected by a history of public riots. Ever heard of the French Revolution? ;) So you really can´t expect foreign immigrants to behave any better. As regards the German Turks: Most of their problems result out of the fact that they refuse to assimilate into german culture. If they really want to be recognized as worthy citizens, they will have to adopt german culture without exception.

Don on :

The American culture is affected wiht a history of telling Europeans who 'know what is best' to go to hell. Ever hear of the American Revolution?

Anonymous on :

You know this isn´t true. The only europeans you told to go to hell in this war were the british, with the help of france, spain and the netherlands...

Don on :

And King George II or Great Britain and Hannover wasn't a European, in fact the most powerful European of the time? Minister Townshend, Lord Germain weren't Europeans? Think on the events of 1867 for that matter. The year when the US invoked the Monroe Doctrine and Louis Napolean precipitously withdrew French forces from Mexico - where they were propping up the undemocratic monarchy France had imposed on Mexico. That wasn't a 'go to hell'?

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