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Saturday, June 10, 2006

What Planet Are You From?

This commentary looks at the economies of the world through interplanetary eyes. The commentary suggests that the European economic model can be viewed as "transforming a tax-raising, military-spending state into a social state devoting huge amounts of money to health ..., welfare and public facilities," and that  "Europe built these liberal welfare states ... not as a vision of a utopian socialist future but as a means of securing political stability and preventing a recurrence of its terrible past":

Economists are from Mars, Europeans from Venus, by John Thornhill, Commentary, Financial Times: A Martian economist visits earth. ... Earthling economists chatter excitedly to our visitor about the stunning growth rates in China. This miracle economy has overtaken France and the UK to become the world’s fourth biggest... China is the future, they proclaim. ...

Our Martian friend scratches its heads. “When my economics professor last visited earth in 1945 he told me that the Europeans had just experienced a terrible civil war in which 36m people had been killed, including many of their most brilliant minds. Now you tell me that 60m French people produce almost as much economic output each year as 1.3bn Chinese, who have been the dominant economic power for most of your planet’s history. What is more, the French can do this while working 35-hour weeks and producing 246 different types of cheese. How did this economic miracle come about?”

The earthling economists stare at each other and then down at their feet. “We don’t normally look at things that way. We tend to say that Europe is suffering from ‘eurosclerosis’, you know, low growth, high unemployment, bloated welfare states and a looming demographic crisis.” “Maybe I need to talk to historians rather than economists...,” says our Martian friend, blinking his eyes and flitting back several months in time...

Tony Judt, the British historian, is talking about the dangers of conflating economic “inevitability” and geo-strategic prediction. That was, after all, the mistake made by Karl Marx. Instead, Mr Judt stresses the primacy of politics in human affairs and explains how postwar Europe created something novel in human history by transforming a tax-raising, military-spending state into a social state devoting huge amounts of money to health, education, pensions, housing, welfare and public facilities. Europe built these liberal welfare states, Mr Judt reminds his audience, not as a vision of a utopian socialist future but as a means of securing political stability and preventing a recurrence of its terrible past...

“Europe today is a compromise caught somewhere between ... prophylactic social provisions and the attraction of maximising profit. Like all such compromises, it is deeply contradictory and flawed. But of all the models that are on offer in the world today, it is the one most likely to be well-equipped to face the coming century,” Mr Judt concludes.

Our visiting economist beams back a telepathic memo... “The US economy is impressive – as previous reports have indicated – but its model is unique, not universal (let alone interplanetary). I know we like to say that Martians are from America and Venusians are from Europe but even our voters would balk at corporate bosses paying themselves huge bonuses while reneging on promises to pay their employees’ pensions. Nor would our Red House be best advised to emulate the White House in its management of public finances...

“China’s economy is astonishing. ... But it should be remembered that just as any number multiplied by 1.3bn people ends up being a very big number, so any figure divided by 1.3bn ends up being rather small. ..."

“In their funny way, it is the Europeans who are at least discussing the big questions we Martians are facing too: how to reinvent the state’s functions and strengthen the realm of collective international (interplanetary) action. For sure, Europeans will have to swallow their medicine by cutting wasteful state spending, liberalising labour markets and revolutionising higher education. But, as the Nordic economies have shown, the state’s provision of public goods serves an economic purpose. Social justice can help maximise an economy’s potential and sharpen its competitiveness. ...

Update: Maybe the lesson is different. Unfettered capitalism must be developed over time with restrictions on private markets eased one by one as the supporting institutional structure is put into place.

While the necessary institutions to support unrestricted markets develop, the state may need to provide economic security and regulate the private marketplace. Though these measures are difficult to remove once in place, after Mars destroys Venus in the war to remove its evil dictator, maybe Mars should not force its strict free market philosophy on Venus during the lengthy redevelopment period if it wants the best chance of free-market capitalism emerging in the long-run.

    Posted by on Saturday, June 10, 2006 at 01:11 AM in Economics | Permalink  TrackBack (1)  Comments (4)


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    John Thornhill at FT.com: Economists are from Mars, Europeans from Venus: A Martian economist visits earth. Not only does its arrival prove — as many suspected — that some economists really do live on other planets, it also provides fresh perspe... [Read More]

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