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Book review: Cowboy capitalism, has it delivered?

By Sukrit Sabhlok - posted Tuesday, 25 January 2005


For a long time, certain Europeans haven’t liked Americans.

Some Europeans feel the United States is using its superpower status irresponsibly, and they feel it is their duty to constrain American power when it isn’t to the direct benefit of Europeans. And, as Washington Post columnist Robert Kagan pointed out in a recent lecture hosted by the Centre for Independent Studies, in this way they deny America the legitimacy it needs to become a force for good in the world.
 
In an article titled Power and Weakness, Kagan notes, “On major strategic and international questions today, Americans are from Mars and Europeans are from Venus”. But it is not just foreign policy where there are stark differences. When it comes to the economic issues, at times it seems a broad river divides the two streams of thought.

Whereas most Americans fondly embrace a society where everyone earns their keep, and private ownership is the norm rather than the exception, many European nations run along social capitalist lines, where the welfare state plays an exceptionally large role. Olaf Gersemann, in his book Cowboy Capitalism: European Myths, American Reality, explores these concepts in detail.

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Gersemann, a financial reporter and recipient of the prestigious Ludwig Erhard prize, has written a comprehensive review of the differences between the American economy and three European economies - France, Germany and Italy. His analysis rests on the notion that the developed American economy has reaped the benefits of sticking with pro-market policies, whereas its three European counterparts have suffered as a result of their more socialist outlook.

By putting in context various microeconomic and macroeconomic indicators, Cowboy Capitalism empirically evaluates whether there is indeed a solid basis for the seemingly irrational European fear of “American conditions”. The author’s findings are consistent with economic experience so far.

America, the more progress orientated economy, has fared significantly better than the more rigid economic models of France, Germany and Italy. Thus, in carefully calculated words, Gersemann puts to bed myths about American unemployment rates, debt levels, productivity, the labour force and high drug prices, among other things.

Unemployment is one indicator that really differentiates these Old World nations from America, Gersemann writes, “Unemployment in the United States reached over 6 per cent in the summer of 2003 - a level that Italy, Germany and France don’t even reach anymore under the best of economic circumstances”. Today, the unemployment rate hovers around 10 per cent for all three European countries.

Despite Gersemann’s tightly woven arguments, there are some (largely unavoidable) shortcomings in his methodology. For instance, international comparisons can be inaccurate for the sole reason that different economic indicators are measured differently depending on the country. In addition, since most of the book is based on freely available statistics, the numbers are open to distortions or alternate interpretations.

But to be fair, for a “minimum of comparability” Gersemann does use data from such organisations as the OECD to draw his conclusions. One of these conclusions is “the French, Germans, and Italians got rich during times in which technological progress was relatively slow and the pressure to adjust quickly was relatively low”.

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By his reasoning, in the early 1980s France, Germany and Italy were healthy economies converging with America. Now, things have taken a turn for the worse after decades of political spinelessness in the face of demands from unions and other lobby groups for subsidies, tariffs, quotas, wage manipulation and other enemies of efficiency.

So why do some Europeans despise America’s clearly healthier economy?

The answer, it would seem, is that they have been misled. Populist politicians know it is easier to promise equality for all, instead of equality of opportunity but inequality of outcome. The local media too, through its dealings in stereotypes, may have cultivated an unfounded distrust of American style “cowboy” capitalism. According to Gersemann, the situation has become such that debate between leaders is no longer about creating growth as much as it is about maintaining the standard of living already in existence.

For the European nations under Gersemann’s microscope, the wish list of higher productivity growth, a more flexible labour force and increased investment in research and development is unlikely to come true without major economic and legal reforms. Unfortunately, economic reform has become a dirty word; the reforms needed to respond to globalisation are criticised as “Americanisation”. 

One would not have thought it would happen anytime soon, but incentives to remain unemployed have recently been cut back in Germany. During December last year, the first steps toward ending government dependency were approved through the cutting of welfare payments for a million jobless and making qualifying for welfare payments harder. The changes, if properly implemented, are intended to help halve unemployment by 2010.

As has been the case so many times before, the usual street protests accompanied this decision to reform the system of unaffordable social benefits. Calls for increased welfare arise regularly in America too, usually from a fear of income inequality. That the poor are getting poorer is in itself a myth and Gersemann argues that what inequality there is should not be construed as arising from unrestrained capitalism.

For example, while it is true that American workers can be fired more easily than their European counterparts, they usually find new work in less than six months, whereas European workers tend to remain out of work for a year or more. Such considered analysis is hard to refute, and as a result this is a valuable resource that will no doubt serve as useful material for intellectual debate in the future.

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About the Author

Sukrit Sabhlok is a PhD Candidate at Macquarie University Law School.

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