Tag Archives: The American Challenge

Is it culture? Or is it incentives?

The Internet in general is US-centric. So even on the European parts of the Internet it’s common for countries (or the entire continent) to compare themselves to America. There are thousands of things you could compare, but the most contentious is probably the economic comparisons. America has recently grown much more strongly than Europe, and it doesn’t take an economist to realize that nearly all of the world’s top companies and startups are located in America. San Fransisco alone has more billion-dollar startups than entire countries, and before you say “that’s just silicon valley,” New York and Boston aren’t far behind.

There are a million ways to explain this discrepancy and plenty of reasons why Europeans may even think it’s good. We could talk all day about whether worker’s rights are fundamentally incompatible with cut-throat capitalism, and if Europe has therefore chosen the better path. But the most flawed reason I see bandied about is that Europe just has the wrong culture for this kind of stuff.

Europe is more laid back, less aggressive. Their investors prefer same, consistent gains. The European mindset isn’t focused on innovation, and culturally Europeans aren’t focused on business the way Americans are.

I think these explanations are wrong and dumb, and I’d use more expletive words if I hadn’t made a New Year’s Resolution not to do so in my writing. I don’t think Europeans are culturally less attuned to startups and Big Business, I think the legal framework prevents it.

Not long ago, Europe was seen as the beating heart of innovation and technology. Industrial progress, scientific progress, just go to any chemistry or physics class and see how many formulas are named for Germans. But now America dominates the industries, and I think it’s because of government, not culture.

The American business framework provides significant bankruptcy protection. People mocked Trump for his many bankruptcies, but most investors know that 90% of good ideas fail and the last 10% have to cover those loses. Bankruptcy is a way for investors to mitigate their downside, and thus allows for bigger risks to be taken.

The American financial system also gives significant benefits to investors, giving them greater flexibility in buying and selling their company to whomever they wish. Until Biden and Trump brought protectionism back to the fore, it was not uncommon to see American companies sold to foreign investors with little fanfare. Nativists and racists may complain about *gasp* Chinese people owning an American company, but from the investor’s perspective selling the company is a good way to cash out his winnings from the investment. Foreign buyers compete with American buyers, and this increase in demand means prices go up. This means the sale price of companies goes up, and that increases the returns on an investor’s investment.

But long before Trump, Europe was made famous in the tech world for blocking foreign buyers from its companies. Again, nativists wrongly think that this strengthens the European tech industry by “keeping it in European hands.” But when an investor sells out, they get cash in return. What do you think they do with that cash? They don’t hoard it like Smaug the Dragon, they reinvest it. Because they’re investors. By blocking foreign buyers, you reduce buying pressure, you reduce how much money investors can get out of their investment, and you therefore reduce their upside potential. Is it any wonder then they’d prefer a safer investment, when Europe is happy to cap the gains on any risky tech investment they make?

And Europe prides itself on fining big tech companies for any reason whatsoever. But surely it’s obvious that a government hostile to profitable tech companies would scare off anyone wanting to make a profitable tech company near them. Better to start in America or get out of Europe ASAP. Microsoft and Apple can afford billion dollar fines, but such sanctions could be lethal to a smaller European tech company. So again investors are scared off, entrepreneurs are scared off, and Europe wonders why it doesn’t have a tech sector.

“But what about ASML and Spotify!” And what about them? For every single, solitary European company that manages to rise above the hostile governing environment, there are 10 American companies that rose under easier circumstances. Spotify started in 2006, and since then Massachusetts alone has started Draft Kings, Moderna and Intellia Therapeutics, all of comparable value to Spotify. And Massachusetts has half the population of Sweden.

People respond to incentives, and the incentives for risky tech investment are very poor in Europe. Bankruptcy is easier in America, returns are (or were before Biden and Trump) less likely to be capped by protectionist policies, and (before Biden) the government generally has taken a more lax approach to dealing with corporations. You can debate if these things are good or bad, but I find them far more likely reasons for America’s tech dominance than “culture” or “attitude.”

The Many Failures of Industrial Policy

“Industrial policy” is once again the word of the day. Much like how Margaret Thatcher’s greatest triumph was Tony Blair, Donald Trump’s greatest triumph will be Joe Biden. Thatcher forced her opponents to change their policy, socialism was nixed from Blair’s Labour, and Starmer it seems unlikely to bring it back. So too did Donald Trump make free trade into a dirty word for Democrats and American politicians in general. Whereas Obama, Clinton, and 2 Bushes all championed free trade agreements, Biden increased tariffs on everyone he could (even Canada). And instead of free trade and free competition, he has made directed subsidies of domestic industry his main economic plank.

Tariffs and subsidies make up the economic policy known as “industrial policy” and to be blunt, I hate it. Industrial Policy exactly what Servan-Schreiber proposed in his book “The American Challenge,” and I think looking at that book with a modern lens outlines industrial policy’s biggest flaws. You can’t predict the future, and so a government that tries to force its economy in certain directions often winds up funding dead ends and missing out on the next big thing. Look at what Servan-Schreiber thought governments should fund (supersonic planes, space industry), and look how much of it was bunk. Now look at all the things Servan-Schreiber didn’t think were worth a mention (genetics, the Internet, renewable energy) and look at how they’ve transformed our modern economies. And Servan-Schreiber wasn’t some rando, he was a French politician who could make actual decisions on French industrial policy.

The government just isn’t as good as the market in actually innovating. And a hands-on government is more likely to try to smother innovation to protect jobs rather than allow creative destruction to increase productivity and national happiness.

There’s also the inherent corruption that comes with the government funding industries. Why is Intel given so much money for making microchips when there are plenty of other chip companies out there? The excuse is that Intel is making “more important” chips, but it looks to me like they’re just plowing government subsidies right back into their dividend, handing that money to their billionaire share-holders. So billionaires receive billions of Federal Dollars, and we’re supposed to assume this isn’t corruption?

I don’t like the government giving handouts and bailouts to their favorite, politically connected billionaires. I’d prefer companies be forced to stand up on their own 2 feet like the workers have to. You want to corner the chip industry? Do it by providing a better product, don’t just demand ever more subsidies and protectionism.

This sort of policy is exactly the kind of failure that we learned about in Latin American history as well. Many countries in the 20th century instituted a policy of “imports subsidizing industrialization,” where they raised tariffs on foreign goods to subsidize domestic industry. This led to political capture by the industrialist however, as they realized it was far easier to protect their profits by demanding ever higher tariffs and subsidies rather than investing in producing better products. In the end these countries were left with bloated, uneconomical industrial sectors giving sub-par products to customers. The customers lost as they got less for their money than if they could just buy foreign products without the tariffs. Even today Brazil has extortionate prices on consumer electronics, higher than any other country, and the prices only go down on the rare occasions when the tariffs get cut.

So I don’t want industrial policy, and I want it even less knowing that my political opponents can control it. America currently has a divided government, but a united government that engage in industrial policy is by far the most likely to simply hand the money to the most politically connected industrialists at the expense of everyone else. If you’re a Democrat, would you want Trump to be handing billions of taxpayer’s dollars to his favorite industries?

And I don’t want the government to subsidize dead end industries at the expense of growing ones. I don’t want them to cut off creative destruction and leave us with hand-weavers instead of looms. I don’t want them to protect domestic manufacturers and leave consumers worse off. I don’t like industrial policy, and I think Biden’s greatest failure is that he has become Trump’s greatest triumph.

Pointless prognosticating, what is the “Next Big Thing”

If you follow the Tech industry, you know that everyone’s always searching for the Next Big Thing, and if you remember my series on The American Challenge, you might remember that I talked about how that book badly missed on some of its predictions of what The Next Big Thing would actually be. This got me thinking, what do I think the Next Big Thing is? What do I think will be the next trillion-dollar industry, the type of thing countries will want to focus on and people will want to invest in, things like semiconductors and computers in the 80s, mass-built automobiles in the 1910s, or trains in the 1800s. The kind of thing that will change the way we do everything, and if you have a chance to get in at the ground floor you’ll be kicking yourself in 20 years if you don’t take it.

To start with, I’ll talk about others’ predictions.

I’ve heard some people talk about Cloud Computing as the Next Big Thing, but it’s hard to tell if it’s truly Next or if it’s more of a continuation of the Current Big Thing. Like, would it make sense to separate the internet revolution from the computer revolution? Both happened concurrently, the first couldn’t have happened without the second and the second was truly skyrocketted by the first. So how does Cloud Computing fit into all this, it’s already a trillion dollar industry with the largest tech companies in the world all throwing money into it, and even if I can’t explain how it works personally I can definitely see that others are talking about it as a revolution. But again it feels hard to tease it apart from computers and internet as a whole, and it doesn’t seem like we’re on the ground floor anymore. Microsoft, Google, Amazon and Meta have all put so much money into their cloud infrastructure that I don’t see any small fries really taking pieces off of them. I’d say Cloud Computing is the current Big Thing.

But that’s mostly semantics, I’ve also heard people say 3D printing is the Next Big Thing. The University of Nottingham for instance has a department that wants to be able to 3D print a smartphone, circuitry and all, using just metal and plastics as inputs. The ability to mass-produce using 3D printing has long been a holy grail of the field, and the ability to custom manufacture pretty much anything by just fiddling with a computer model would certainly be a game-changer. But 3D printing has so many technological limitations that I still wonder if it will truly take off, most glaringly, 3D printed items tend to not work well out of the printer, and fall apart quickly even if they do, which is a big barrier for mass-production. Ultimately I just wonder if 3D printing will be something more like Supersonic Travel was in the 70s, something that was seen as the mass-market future but was in fact relegated to only specialized roles while more boring “old fashioned” things kept their market share.

The Internet of Things is something I’ve never really gotten the hype for. There are certain applications where having a device always connected to the wifi seems like it could be value added, but most of the hype seems to be marketers trying to see a subscription service for a device that used be be a one-time purchase, or from unrealistic promises that don’t fix the Oracle Problem (ie suppose you give you machine a wifi connection so it can always tell you when certain conditions are met, but will you necessarily trust that your machine is giving you good data or will you have to double check each time anyway, negating the benefits of having the wifi in your machine). Frankly, I don’t want anything in my house to be connected to the wifi unless I expect or need to play Youtube on it.

Another Next Big Thing could be the DNA/protein revolution. The Human Genome Project was a massive success, as was the development of modern Mass spectrometry, and a huge amount of modern biochemistry couldn’t exist without these techniques. Our ability to read the sequence of any protein or piece of DNA we want to, and to alter them in any way we please, have definitely given us a leg up in fighting genetic diseases and engineering proteins for a number of different purposes. In theory, biochemistry can let us create proteins to do just about any job that ordinary chemistry does, only faster and better. This includes highly speculative roles like uranium enrichment and carbon capture to even humdrum every day roles like plastic production. The ability to use genetics and proteomics to both cure our diseases and for industrial purposes is certainly enticing, but I’m still not sure the technology is there or will be there soon. Without getting too jargon-y, proteins can only do their job if they have the correct shape, and our ability to create any shape we want is not fully developed. When you change a single piece of a protein, it can have enormous effects on the protein’s structure and function, and it’s often difficult to even test these effects. Some people have told me that “genes and proteins are the next coding language” but until it’s as easy to test a protein as it is to test a program, I’m not sure that’s true.

Finally, outer space. Will the next trillion dollar company be a space company and not a tech company? I’d love that to be true, but I’m not sure. The best argument I’ve heard for the economic viability of space colonies was actually a really dumb and technical one. If you assume that there is already people living on both the Moon and on Earth, then in theory it is cheaper to ship anything from the Moon to the Earth, versus shipping something from the Earth to the Moon (due to differing gravity and atmospheric drag effects). If we then assume that economies of scale can be harnessed to make producing things on the Moon and producing things on Earth cost almost the same amount, then any company that moves its production from the Earth to the Moon has a comparative advantage that cannot be taken away, and it can service both the population on the Moon and the population on Earth more cheaply. Thus a Moon colony should be (economically) self-sustaining once it reaches a certain size. There are of course a hell of a lot of assumptions with this plan, and some of them are even bad assumptions, but this is genuinely the only compelling argument I’ve heard for colonizing space other than the Tsiolkovsky argument, which isn’t much more of an argument than but I WANT it to happen.

So what is the Next Big Thing? Honestly I don’t know, and I don’t think anyone does at this point. That was one thing I kept thinking about while reading The American Challenge. JJSS and people like him seemed to think that the best way to run a country was to foresee what would be the “Next Big Thing” and then invest in it. But JJSS’s predictions on The Next Big Thing were 1/3 or 1/4 depending on how you wanted to score him, and frankly redirecting national budgets into government projects with all the bureaucratic inertia and election-cycle-thinking that comes with them just seems like a terrible idea. Better to let the free market create a virtuous cycle where the good ideas win and the bad ideas lose, rather than create a government system that can be handcuffed by political or interest-group concerns to throw good money after bad and ignore successes in favor of prestigious failures. I don’t know what the Next Big Thing is, but what do you think? Feel free to comment below.

Why was everyone in the 60s so high on Supersonic air travel?

I get a small sense of morbid schadenfreude reading old books on economics.  Occasionally the authors make some of the most insightful predictions I’ve ever read about the nature and direction of the economy of their future (our past), but more often they miss wildly and I get to feel superior while reading a book on the bus.  I’ve now noticed a pattern though of writers from the 60s: a whole lot of people expected supersonic air travel to be the Next Big Thing.  I’ve already written about how the American Challenge predicted it as one of the most important challenges that Europe needed to invest in.  I’ve now started reading The New Industrial State by John Kenneth Galbraith, in which he singles out supersonic air travel as “an indispensable industry” of the modern economy.  As I’ve noted before, supersonic passenger planes never quite took off as advertised, but it’s a fun little theory to look at why people might have expected them to do better than they did.

At first, supersonic travel seems like no less than the next logical conclusion of human travel.  First we walked, then we invented wheels to carry our stuff, then we built ships then railroads then automobiles then planes.  Each step in the evolution of human transportation seemed to bring an increase in speed and thus a huge economic advantage, so it seemed only natural that supersonic travel would follow this pattern.  But I think the constant increases in speed blinded people to the more important increases in efficiency.  Airplanes are much faster than cars and ships, yet to this day far more international trade is conducted by land and sea than by air.  In order for airplanes to compete as a mode of travel, they not only had to be faster but the gain in speed had to outweigh the increase in cost.  For moving people around this gain is very easy as none of us wants to sit on a boat for 4 weeks to get to our destination.  But for moving cargo that gain is much harder because the cargo doesn’t care as much about its speed and the cargo’s owner only cares how much fuel he has to spend moving it from A to B.  So speed only leads to efficiency in some cases, in others the higher cost of fuel means more speed has less efficiency.

The same dichotomy between speed and efficiency exists for supersonic vs subsonic planes.  The supersonic Concorde could of course do a transatlantic route in just under 3 hours, and this gain in efficiency was appreciated by its many passengers.  But the even greater gain in efficiency came from planes like the Boeing 747 and other “Jumbo Jets” that could take hundreds of passengers across that same route using significantly less fuel per passenger.  That meant a ticket on a 747 could be a small fraction of the price of a Concorde ticket, and there just weren’t enough ultra-high-class passengers to make the Concorde cost-efficient. 

It just seems like nobody did their due diligence on a cost-benefits analysis for supersonic transportation, or instead they looked ahead with starry eyed wonder and proclaimed that “technology” would in some way ensure that supersonic travel was made efficient enough to compete.  

The American Challenge Finale: Eurofederalism for the future?

I know I haven’t written much about the American Challenge for a while, but as I read through the book I realized most all of my critiques would be retreads of what I had already said.  In the end, Jean-Jacque Servan-Schreiber’s thesis was made clear from the outset: Europe was falling behind in technology and economics and his preferred cure was Eurofederalism.  As an aside, some of my American readers might not know what Eurofederalism is, it’s basically the idea that Europe (the EU to be more specific) should continue forming an ever closer union between the states, such that political and economic power rests more and more with the supranational EU rather than the nations themselves.  Exactly what the end goal of Eurofederalism is varies from person to person, some people envision a United States of Europe, some want more federalism, some want less, but most would agree that the current amount of cooperation is not enough.  

With Servan-Schreiber’s thesis laid before us, it’s tempting to look back and try to judge how right he was.  On the one hand, I can see all his arguments from 1968 being made today in 2022: Europe still falls behind in certain sectors to American multinational corporations, and many Europeans still think the cure is Eurofederalism, so it’s tempting to call him a true visionary who noticed these things well before others did.  On the other hand, many of the problems he identified from 1968 were solved by Europe without the kind of Eurofederalism he envisioned.  University graduation steadily climbed in Europe to reach the same highs it did in America, Europe’s growth rate climbed so that America never outpaced it to the extent he though they would, and although Europe does not control many of the tech companies of today, they still have not missed out on the productivity gains that tech has brought because buying a computer is still as good as building in yourself.  Perhaps the Four Freedoms on the EU have helped Europe reach this point, but it’s clear that a common, EU-wide industrial policy was not necessary to maintain Europe’s economic growth in the face of American corporations.In the final tally, I do believe Servan-Schreiber was prescient for his day, identifying key weaknesses in the European economies and key strengths in the American one.  But in other ways he was wide of the mark, many industries he wanted to throw money at are not the ones building the future, and his preferred answer was not necessary for Europe to “catch up” in many ways to America’s standard of living.  Overall though, a very enjoyable read: 8/10.

The American Challenge Part 7: Building an economy by predicting the future

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.

The American Challenge Part 6: The future will not be supersonic

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.

The American Challenge Part 5: Why can’t Europe Compete?

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.

The American Challenge 4: The Computers of America

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.

The American Challenge 3: why was America so economically strong?

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.