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.