In yesterday’s post I outlined the thesis of Jean Jacques Servan-Schreiber’s The American Challenge. In this 1968 book, the author opined that America and a select few countries were growing and developing at such a rate that they would rapidly leave most of Europe in the dust. This predicament seemed to him as serious a divergence as the Great Divergence between the industrial and non-industrial economies in the 18th and 19th centuries. Servan-Schreiber relates that in his time, Americans were by far the largest investors in European economies, and American companies were the movers and shakers of the European markets. This foreign investment from America had provided immense wealth to Europe, the author continuously brings up the wealth and power of IBM-France, which in 1968 was one of the leading computer companies in the world, all backed by American investment.

In addition to the investment, American workers seemed to him to be key benefactors of this new economic reality. American multinationals had the wealth and resources to take over European markets, and American managers were usually brought in to train the Europeans in the American style and to manage the business how the American companies wanted.

Now, between the investment and the workers, it seems like Europe had a lot to gain from this arrangement. American investment brought with it jobs and new technology for Europeans, American managers brought their management style and their management technology, which Servan-Schreiber accepts was a net good for European companies, as American management had been proven to be more efficient. So if Europe was benefiting from this arrangement, why not just continue it? Why not allow America to invest more and more in Europe and thereby ride the rising wave of progress into a better tomorrow? Servan-Schreiber thinks this would be a terrible idea, because this system was a short term benefit but a long term hindrance.

Yes American investment provided jobs, but as long as it was Americans and their corporations which controlled the new products, new technology, and new money coming out of those investments, then America would continue to control Europe’s future. This wasn’t just nationalist hand-wringing, Servan-Schreiber claimed that any new product or idea, even ones developed in Europe, will be controlled by America and implemented first in America before spreading to Europe. America will get the fruits of technology progress first, Europe will languish behind. Secondly, the dividends taken by American companies will be reinvested first in America, the homeland of these companies, rather than in Europe. Already by his time, the dividends which flowed from Europe to America outweighed the investment flowing from America to Europe. This meant that the great wealth produced by Europeans would be concentrated in America and the hands of Americans, seemingly to the detriment of continued European economic progress. With Americans controlling not only the technology developed in Europe (since they made the investments and thus they control the patents) as well as the wealth of Europe (since they made the investments and thus they control the dividends), the relationship will turn into an extractive one in which the benefits flow in one direction and are mostly reinvested in the American economy.

Can this system be overturned? The most direct way Europe could try to save itself would be to nationalize these American companies, yet even this would not help according to Servan-Schreiber. Because a modern corporation’s wealth doesn’t come from the buildings or the factories, it comes from the technological know-how of the employees, the supply chains of the production line, and the management systems that ensure efficient distribution of resources, and these are all hard or impossible to nationalize. If you nationalized IBM-France, the most highly skilled workers might simply flee to IBM-America to continue their work there. IBM-America would continue to hold the contracts to the supply chains which are necessary for the production of goods, and the skilled managers would also likely flee with the workers to higher paying American jobs. You would be left with a bunch of empty buildings, with none of the input materials, skilled workers, or efficient management systems that are necessary to make products.

But even if you could circumvent that, even if you could convince enough of the workers and managers to stay at IBM-France, and even if you create brand new supply chains out of whole cloth, you STILL wouldn’t gain by nationalizing the company. IBM-France would simply be a smaller, weaker version of IBM-America, unable to compete with it in any market outside its home of France. Not only that, but by nationalizing one company you would likely scare away almost all of the American investment which has provided so much wealth and technology in the post-war years. American companies and investments would flee, taking with them the future promises of economic and technological development, and the smaller, weaker IBM-France would not be able to fill the void. So while nationalization seems like an easy solution, the author believes it would quickly turn the problem from bad to worse.

So if nationalization isn’t a solution, what is? Come back tomorrow while I continue my dissection of this fascinating book.