I’m still going through The American Challenge by Jean Jacque Servan-Schreiber, the 1968 book which opines on what Europe needs to do in order to not be economically dominated by America.  A consistent theme for Servan-Schreiber is that European governments should direct investment towards key industries which he thinks are important for the economy of the future.  In some cases he was incredibly prescient, he urges Europe to invest in semiconductors and computers years before they hit the mainstream.  In other cases he seems woefully misinformed, claiming that all future air travel will be supersonic and the Concorde will be surpassed by American supersonic planes.  And in some places he’s oddly silent, saying little to nothing about the future need for renewable energy and global reductions in carbon.

Now of course, he shouldn’t be dismissed for not correctly predicting the future, should he?  Who knew that supersonic flight would never take off?  And how accepted was the idea of global warming in 1968?  Yet this is exactly my problem with his economic model, he can’t predict the future, and no one can.  So his claim that the cure for Europe is to decide which industries are “the future” and invest heavily in those industries above all others doesn’t strike me as very sensible.  Instead of the government choosing which industries to invest in, why not create an economic system which allows good industries to start up and flourish?  A government is by its nature a centralized organization, and that centralization comes with both costs and benefits.  Notably, the people directing the government’s economic investments can’t always be experts in every industry they want to invest in, it’s just not possible for a few hundred government workers to include an expert in everything.  So what if you panel on government investment doesn’t include anyone familiar with computers?  Do you pass the idea up?  And what if your panel does include “experts” in cold fusion, do you redirect all efforts towards a futile project?

This to me isn’t an idle criticism, I don’t think a centralized entity can replace a decentralized market with the same kind of efficiency.  I’m not some harebrained anarcho-capitalism mind you, I’ll try to write later about where the government should get involved, but the maxim of “the government shouldn’t try to choose winners and losers in the market” is one I think has merit, the government just can’t be expected to have enough people and enough breadth to be an expert on all the decisions a market can make.

I think there’s more to this “can’t predict the future” argument too.  Servan-Schreiber has what I have called before a “Sid Meier’s Civilization” view of technological progress.  In essence, this viewpoint is that technology costs a certain amount of “something,” be in money or man-hours, and once you discover a technology it’s yours to use while your opponents don’t have it.  Technology thus progresses as a race where countries need to either catch up to the techs their opponents have (by spending money and man-hours) or find new techs their opponents don’t have (so they can have a decisive advantage).  The problem with this view is that there are many technological paths that prove to be a dead-end where you’d have been better off not spending your resources, and we don’t know which are dead-ends beforehand.  I said last week that the Concorde jet was one such dead-end, it costed billions of dollars with not a lot to show for it, and that was money that could have been invested in the NHS or other government services.  The idea was that if we just keep pouring money into Concorde, eventually we’ll create supersonic flight and it will be just as profitable and useful as we’ve always dreamed it would be. Or at worst we’ll learn a lot of lessons about what we need to do in order to create profitable supersonic flight and our next project will be the one that works.  That wasn’t the case, it turned out supersonic flight just couldn’t compete with moving a massive amount of people slightly more slowly.  Another dead end would be fusion power, an area where we still don’t know if we can do it with modern tech let alone tech from the 20th century.  Many many people predicted that fusion was The Future, and urged governments to invest in it.  But fusion wasn’t the future and it’s probably a good thing that a lot of money wasn’t spent on it.

You can’t predict the future, so a government can’t reasonably be expected to know which opportunities to invest in and which to avoid.  A market uses the wisdom of crowds to decide, and so can be relied on to provide at least some of the efficiencies a government board lacks.  It’s easy to look back 50 years and say “if only Europe had invested more in computers!  We could have had European versions of Apple, Google, Microsoft and Amazon!”  But it’s hard to sit where you are today and decide which of the many investment opportunities are “the one” to invest in.  For example, if Europe should have invested in computers in the 60s, what should it invest in right now?  What is the game-changing area, with returns equal to or greater than the computer industry of the 60s, that Europe should throw all its money in?  3D printing?  Genetic modification?  Robotics?  What is the “investment of the future?”  I’d hazard a guess that no one can agree, and so it’s probably better to rely on the wisdom of the crowds than the political decisions of a government.

As readers will know, I’ve been reading The American Challenge by Jean Jacque Servan-Schreiber, a book written in 1968 about the problems Europe will face competing economically against America.  It’s always a joy reading through old books and seeing their predictions for the future, and while this book has definitely been a doozy as we’ve seen, I feel the author was WAY off was his predictions about supersonic flight and the French/British Concorde jet.  At a glance the Concorde venture seems to be an example of exactly the kind of public/private partnership that Servan-Schreiber says will be necessary and useful in the economy of tomorrow.  I didn’t take note of it but in discussing the “post-industrial” economy of future-America, he envisions that “private enterprise may no longer be the major source of scientific and technological development” and “the free market may take second place to the public sector.”  Essentially he envisions even the governments of capitalist countries taking on more of the burden of economic risk and development.  He even lays this out as part of why American companies are so successful: they grow to a sustainable size and then get big government contracts that launch them into international relevance.

Yet for all that, Servan-Schreiber spends most of his time griping about how the Concorde is an inferior product to what he expects Boeing will produce with the 2707.  He lays out all the ways Concorde has fallen behind: the Boeing will use titanium because an American public/private partnership has made that economical, and the Boeing will use a swing-wing design which the Concorde’s engineers in their risk-aversion did everything in their power to avoid.  The Boeing will even carry almost twice as many passengers as the Concorde, so while Concorde will get to the market first, Boeing will certainly gobble up its market later with a better, more efficient plane.  All in all, the author claims that Concorde will be the last plane of an old era, perhaps in service no more than 10 years, while the Boeing 2707 will be the first plane of a new era with a longer lifetime and much more to build off of design-wise.

My older readers will already be chuckling.  The Concorde lasted a quarter of a century from 1976 to 2003, while the Boeing 2707 was canceled before Concorde even entered service and Boeing never released a supersonic passenger jet.  Yet Servan-Schreiber’s griping about Concorde may have been vindicated for the exact opposite reason he envisioned: because the future was not supersonic.  The Concorde, for all its technological marvel and prestige, was regarded by the private sector as little but a technological boondoggle.  It costed about 2 billion pounds in R&D and only 20 were ever made.  Inflation adjusted, the tickets for a New York to London flight would cost about 13,000$ today, and they’d have almost zero amenities since every ounce of weight needed to be saved.  You were paying super-premium prices for economy class seats, and no recliners!  To the private sector, the Concorde was a failure and no supersonic passenger jets have followed it.  It was a government prestige project built partly on fear of missing out and losing to the Americans, and was sustained even after the Boeing 2707 was canceled due more to political than economic arguments.  The amount of investment never justified its return, and if you traveled back in time to tell Harold Wilson’s Labour government what it’s future would be, he might have been justified in dumping all that Concorde money into the NHS instead. The Concorde was an example of exactly the kind of public/private partnership that Servan-Schreiber thought Europe needed more of, yet most of his gripes were that the French and British weren’t playing nice with each other and they needed more unity to make the thing work. 

But alas, the future was not supersonic, the future was 747.  The Boeing 747 was introduced in 1970, over 1500 have been produced, and it still flies today.  And the development costs were comparable to the Concorde, total cost of 3.4 billion dollars for the 747 (in 2004 dollars) vs 2 billion pounds for the Concorde (in 1976 pounds), if someone wants to check my math with the inflation and conversion go ahead, but that looks pretty comparable to me.  And in some ways Boeing did succeed for a few of the reasons Servan-Schreiber defined, they had more capital than their European competitors, and better access to management and technology that would allow for big developments in engineering and design.  Having a bigger number (the biggest plane, or the fastest plane like Concorde was) is very important for national prestige and so always invites government investment, but sometimes just making something good and economical is better, and from 1970 to today American companies have been very good at doing just that.

In my continued posting about Jean Jacque Servan-Schreiber’s The American Challenge, written in 1968. We have come to the part in the book where he lays out why he thinks Europe fell behind economically by his time period. We have already seen that American Companies are seen as more dynamic, with higher profits, larger investments, and a larger educated cadre of workers to hire. For all these reasons, Servan-Schreiber claims that rather than being a boon to European business, the 1960s forerunners of the EU such as the EEC (European Economic Community) and others are simply being a boon to America. Now instead of needing to have different branches in each country, an American company can set up a single European branch and export its products to the whole EEC. American companies can take advantage of these efficiencies while European companies, still struggling with lower profits and less educated workforces (says Servan-Schreiber) are outcompeted. In short, Servan-Schreiber says that since the beginning of the EEC, the economic gap between America and Europe has only gotten wider.

One of his greatest laments appears to be a very modern one, that despite the supposed economic union, each European country continues to pursue its own goals and directives completely divorced from the others. The demand for unanimous rather than majority voting means that nothing can be done which is unacceptable to any state, and this means that all controversial problems are shoved to the side while the nations of the EEC continue to do their own things. Even when the nations do try to work together, he claims they spend most of their time arguing to ensure they each get a fair share of the money in the pot, rather than actually trying to get something done. He even claims that despite the common market for European Coal and Steel being the very first of the EU/EEC pan-European institutions, “by 1968, there is no longer a common market for coal and steel.” Each nation is busy protecting its own industries and the capital markets are completely divorced from each other. So a German or French industrial company operates almost entirely within their own nation, while an American industrial company will operate not only in America but in all the nations of the EEC as well, gaining an economy of scale benefit that EEC countries lack.

In short, Servan-Schreiber is a Eurofederalist.

As blithe as that statement may be, it feels an accurate one from my reading of him. He does have some other kooky ideas to be fair, he speaks about a future where each European state commits to specialization in a few areas “in the Sweden or Swiss model,” and to spend their resources prudently in only these areas, but that seems like a fantasy with a bad outcome. If Germany decides to specialize in cars, who’s to say their cars will always be the best? Why shouldn’t German cars face competition from Italian or Swedish cars that are also quite good and have investments from their own governments? But a few kooky ideas aside, his main point seems to be that the current European unity is an illusion, and Europe needs real unity in order to compete with the United States.

In some ways this may be oddly prescient. Remember the earlier chapters in which Servan-Schreiber made dark predictions that America would skyrocket past Europe economically? How Europe would be reduced to a near colonial status while America enjoyed unimaginably higher standards of living? Yeah, none of that actually happened, America and Europe are still close together in economic standards of living. I’m no historian, so I can’t tease out the cause and effect, but how much of this was caused by the EU itself? The EU is after all a Eurofederalist’s dream from the perspective of 1968. A truly common market where selling across borders in Europe is no different than selling across state lines in America. Add to that the prodigious increase in college educated workers that Europe gained during the 20th century, and it seems like perhaps Servan-Schreiber’s dark predictions did not come to pass precisely because Europe took the steps he suggested to mitigate them. It’s food for thought at least.

As I’m going through The American Challenge, one of the most fascinating aspects is the prescience (or lack thereof) the author and others had for computers. This book was written in 1968, and yet already computers were identified as a factor which would accelerate the economy of America, perhaps even launching it past Europe. It’s no secret that of the 5 largest companies in the world today, 4 of them are American tech companies (Apple, Microsoft, Google, Amazon). The computer has been good for America, and it’s intriguing to see that having been predicted so early on.

The author envisioned the computer as thrusting America into a “spiral of progress” during the 1980s (which could roughly be seen to coincide with the development of home computers). The author even predicts an “information technology revolution” in which computers would be integrated into nearly every facet of the economy and culture of society, since their transformative power to replace human calculation and information retrieval is by no means limited to the hardest math problems or most complicated queries. The author does however repeatedly assume that this economic revolution will lead to a shrinking work week, which hasn’t happened whatsoever, American workers have continued to be more productive just as the author predicted, but we haven’t reaped all the rewards of that productivity.

The book goes further in sharing a speech from William Knox, of the Office of Science and Technology for the White House. In it he predicts:

• Computers of 1980 will be a thousand times smaller than 1968, yet will be capable of a billion operations per second (Moore’s Law)
• Computers will be small, powerful and inexpensive. They will be no more difficult to learn how to use than a car
• Computers will perform processes in “real time,” they will be capable of all performing all their functions without having to wait for the insertion of punch cards
• Computers in 1980 will be able to store all the written contents of the world’s libraries, and retrieve them on demand
• With the help of satellites, computers will be able to link people together from different continents to send data back and forth almost instantly
• Images will be able to be transmitted alongside text messages. (Cat memes are not far off!)
• By 1980, American schools and colleges will have computers in them, not only to help organize the students but for the students to use as well

Now, he does stumble with some of his predictions, he thinks that we would soon interface with our computers primarily by voice whereas even today I don’t trust Amazon Alexa or Google Assistant to understand me more than 7/10 times. However overall the insight that computers would be part of the next technological revolution was not far from the truth.

But of course, these things didn’t lead America to completely overtake the European economies like the author and others expected, and I think part of it comes down to this: while producing computers is good value for money, consuming them is as well. It’s true that most facets of the modern computer industry are controlled by American companies, if you want to buy a personal computer chances are it will be American branded. But inventing and producing computers isn’t necessary to gain their benefit. European non-tech companies also saw massive productivity gains by buying computers and integrating them into their systems. As I said in part 3, it seems like the education gap between Europe and America was closed sometime in the 20th century, and once that happened the benefits of the computerized economy were available for European companies and workers as well, without having to continue importing American managers and American technicians as the author had expected. In short, the computer revolution occurred, but its effects were much more evenly distributed than the first industrial revolution, perhaps in part because computers themselves are so efficient at transmitting information.

On a final note, one thing William Knox said struck me as prescient both for his time and for our own. He spoke of how computers would so completely transform our communication, that we may find it hard to even communicate with people who don’t have access to one, and those people may be left to the side of the wider global communication network. I think this is still true today, for people who socialize on the internet, those who aren’t on the internet aren’t really part of the culture and their voices aren’t heard. If you don’t have a computer or don’t use one, you’re basically muted from much of the wider culture of today, totally unheard except in extreme circumstances.

On Tuesday I continued to discuss the American Challenge, a book from 1968 in which author Jean Jacque Servan-Schreiber argues that the American economy is growing at such a rapid pace, it will quickly outpace most of Europe and enter into a neo-colonial system with the European countries, extracting their wealth and talents while leaving them without the ability to develop new industries on their own.  The big question that has yet to be answered is why was America’s economy so powerful in 1968?  I don’t know what the boomers think, but I don’t know of many Americans who look back on the 60s with fondness for its booming economy.  But according to Servan-Schreiber America’s economy was indeed booming, rapidly outpacing Europe, the USSR, and the vast majority of the world, steadily increasing the technological and quality-of-life gap between America and the rest of the world.

A discussion of America’s boom years should encompass both where it started and where it was going.  By 1968 America already amounted to 1/3 of the world’s GDP while encompassing just 1/17 of its population.  It controlled the majority of the world’s production in high tech goods, including chemicals (60%), electronics (68%), and automobiles (76%).  In addition to this strong base, America’s economy seemed poised for continued rapid expansion.  American companies were on average more profitable than European ones, and more profit was re-invested into new technology and ideas.  Servan-Schreiber’s thesis appears to rest at least in part on profits from big business as drivers of technological innovation.  The fact that IBM made over a hundred million dollars in profit and re-invested roughly half of that would guarantee it continued dominance of semiconductor technology in the years ahead.  I’m unsure of the validity of this thesis, many of the most profitable high-tech companies today didn’t even exist when Servan-Schreiber wrote his book, so it appears that a full study of startups and their position in the tech eco-system may be lacking from this book.

Regardless, it is clear that in Servan-Schreider’s time, American companies were making more money and re-investing more into new technology than their peers, and to Servan-Schreider and others this was causing a widening gap between the standard of living in America and the standard of living elsewhere in the world.  But we still haven’t answered why America was so able to do all this.  Why were its companies so profitable?  Servan-Schreider has a simple answer: education

According to Servan-Schreider’s data, in 1965 44% of University aged Americans were enrolled in education.  By contrast, France had 16% of University-aged young people enrolled in education, Italy had 7%, Germany 7.5%, Britain 7%, Belgium 10%.  The highest enrolment in Europe was the USSR with 24%, just barely half of the American enrollment.  Not only did America have more students enrolled, it had more poor students, the author states that working class children in France make up 56% of the population but just 12.6% of students.  By contrast, the author makes special note of the following: “In the United States, on the other hand, from three to five times as many children of workers and farmers have access to higher education as in the Common Market countries.  His conclusion is that social mobility was far more available in America than in Europe.

Finally, in addressing the education gap the author quotes Robert McNamara, who at the time was the US Secretary of Defense. McNamara strongly agrees that the growing gap between America and Europe is due largely to education, not just the education of scientists and engineers but of managers as well.  We may best remember that McNamara was a former business executive at Ford, and so he probably thought of most everything as a management problem.  Still, he argues that good management is required to take advantage of new technologies and ideas, as well as the new organizations to promulgate them.  The gap, he reasons, is because America has had the corps of trained managers capable of utilizing computers, logistics, and new methods of measurement in order to create better and more efficient companies, and that if Europe wants to catch up it needs to train managers of its own.  In a way this is precisely what Servan-Schreider lamented earlier in the book, that modern European countries are constantly looking to America for their managers and highly skilled employees, and this in turn makes Europe become more dependent and “colonized” by the American economy as it is unable to staff its own companies and build its own ideas separately from America. McNamara’s solution is blunt: train better managers.  Get more people into higher education, more people skilled in using and building off of new technology, and then you won’t have to import so many Americans.For me, a modern person reading the book, all this sounds very surprising.  I was not aware that in 1965 fully 44% of the college-aged Americans were in school, or that the number was so low in Europe.  A quick search says that for America this number has barely changed, 42% of Americans 18-24 years old are enrolled in college or graduate school.  I can’t find equivalent data, but in the UK 38% of 18-year-olds are going into University and in Europe 41% of 24-35 year-olds have a degree.  Although these numbers aren’t directly comparable to each other, they do seem to demonstrate that the gap in higher education has been all but erased between America and Europe.  Servan-Schreider’s book is in some way a clarion call for action, and his most direct solution presented thus far is an increase in higher education for Europeans.  That exact increase seems to have occurred. Perhaps this is why our two economies never diverged as he predicted, maybe Europe took his advice.

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.

The post-industrial societies shall be America, Canada, Japan and Sweden.  That is all.

I’ve been reading an interesting book from 1968 called The American Challenge by Jean Jacques Servan-Schreiber.  In it, the author notes that America and American companies had invested and profited greatly from the economic boom in post-war Europe.  Meanwhile, European companies had for a variety of reasons not reaped the same rewards (in the author’s opinion), and so by 1968 almost all the important multi-national corporations in Europe were either American owned or staffed by Americans rather than Europeans.  The author furthermore predicted that by the end of the (20th) century, American investments will push America to an unprecedented level of wealth and power, above and beyond what most of Europe could achieve.  He claimed that America would become a post-industrial society, one in which industrial revenue would skyrocket, labor productivity would skyrocket, and the coming cybernetic future would be used to build such wealth and power and to be almost unimaginable to the people living in his age.  

What he seemed to be getting at was the idea of a second great divergence.  The first “Great Divergence” was the economic divergence in the 18th and 19th centuries between Europe/North America and the rest of the world (Asia, Africa, and Oceania).  Within a relatively short amount of time, industrial Europe increased its GDP per capita many fold, enabling them to have more food, more goods and better services (things like trains) than any other place on earth.  It was the reason that in the 19th century, middle class Brits could travel all over the world by train or steamship and be warmed during the winter by gas heating piped into their houses.  These would all have been a huge luxury to people living anywhere else on the planet, and been almost unthinkable just a few centuries before.

This “Second Great Divergence” that Servan-Schreiber seems to expect would be similar to the first, in which some parts of the world experience rapid rises in living and technological standards, fueled by an economic system of “post-industrialism” (as he calls it) rather than industrialism. This post-industrial economic system would create a stark contrast with the industrial societies, which would include most of Europe. Post-industrial societies, he claims, will be to industrial societies as industrial societies are to per-industrial societies: richer, more leisure, more health, and able to control and dominate them in a semi-colonial fashion. Like the first Great Divergence, this second Divergence would be concentrated geographically, but unlike the first Divergence, Servan-Schreiber predicts that (most of) Europe will not reap its benefits.  His gloomy prediction in 1968 was thus: “[in 1998] the post-industrial societies will be, in this order: the United States, Japan, Canada, Sweden.  That is all”

Now, this divergence doesn’t seem to have happened, nor does it seem to have occurred that American businesses control all aspects of the European economy (as Servan-Schreiber predicted).  But it’s enlightening to look at the predictions he made half a century ago and see just what it was that made him think this was the future.  For the next week or so I will be going through parts of the book to analyze what he saw as the state of Europe in 1968 and why he thought it would lose so much ground relative to its peers.