Perspectives on the performance of the continental economies

Perspectives on the Performance of the Continental Economies CESifo Seminar Series edited by Hans-Werner Sinn Michael M Hutchison and Frank Westermann, editors, Japan’s Great Stagnation: Financial and Monetary Policy Lessons for Advanced Economies Jonas Agell and Peter Birch Sørensen, editors, Tax Policy and Labor Market Performance Marko Köthenbürger, Hans-Werner Sinn, and John Whalley, editors, Privatization Experiences in the European Union Jay Pil Choi, editor, Recent Developments in Antitrust: Theory and Evidence Ludger Woessmann and Paul E Peterson, editors, Schools and the Equal Opportunity Problem Bruno S Frey and Alois Stutzer, editors, Economics and Psychology: A Promising New Field Mark Gradstein and Kai A Konrad, editors, Institutions and Norms in Economic Development Robert Fenge, Georges de Ménil, and Pierre Pestieau, editors, Pension Strategies in Europe and the United States Steven Brakman and Harry Garretsen, editors, Foreign Direct Investment and the Multinational Enterprise Reinhard Neck and Jan-Egbert Sturm, editors, Sustainability of Public Debt Roger Guesnerie and Henry Tulkens, editors, The Design of Climate Policy Stephan Klasen and Felicitas Nowak-Lehmann, editors, Poverty, Inequality, and Policy in Latin America Gregory D Hess, editor, Guns and Butter: The Economic Laws and Consequences of Conflict Timothy Besley and Rajshri Jayaraman, editors, Institutional Microeconomics of Development Paul DeGrauwe, editor, Dimensions of Competitiveness Vivek Ghosal, editor, Reforming Rules and Regulations Edmund S Phelps and Hans-Werner Sinn, editors, Perspectives on the Performance of the Continental Economies See http://mitpress.mit.edu for a complete list of titles in this series Perspectives on the Performance of the Continental Economies edited by Edmund S Phelps and Hans-Werner Sinn The MIT Press Cambridge, Massachusetts London, England © 2011 Massachusetts Institute of Technology All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher For information about special quantity discounts, please email special_sales@mitpress mit.edu This book was set in 10/13 pt Palatino by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data Perspectives on the performance of the continental economies / edited by Edmund Phelps and Hans-Werner Sinn p cm – (CESifo seminar series) Includes bibliographical references and index ISBN 978-0-262-01531-8 (hardcover : alk paper) Europe, Western–Economic conditions–1945- Economic indicators–Europe, Western I Phelps, Edmund S II Sinn, Hans-Werner HC240.P383 2011 330.94–dc22 2010035922 10 Contents Contributors vii Series Foreword ix Introduction: Gauging and Explaining Economic Performance in Continental Europe Edmund S Phelps and Hans-Werner Sinn Entrepreneurship in Europe and the United States: Security, Finance, and Accountability 27 Roman Frydman, Omar Khan, and Andrzej Rapaczynski Europe’s Venture Capital Institutions Are Good Enough Richard Robb Promoting Entrepreneurship: What Are the Real Policy Challenges for the European Union? 91 Anders N Hoffmann Innovations to Foster Risk-Taking and Entrepreneurship Robert J Shiller 135 Europe: Cultural Adjustment to a New Kind of Capitalism? Harold James 151 Venturesome Consumption, Innovation, and Globalization 169 Amar Bhidé Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data? 223 Philippe Aghion and Ioana Marinescu 65 vi Contents Policies to Create and Destroy Human Capital in Europe James J Heckman and Bas Jacobs 10 Market Forces and the Continent’s Growth Problem Gylfi Zoega 11 Controversies about Work, Leisure, and Welfare in Europe and the United States 343 Robert J Gordon 12 Revisiting the Nordic Model: Evidence on Recent Macroeconomic Performance 387 Jeffrey D Sachs 13 The Welfare State and the Forces of Globalization Hans-Werner Sinn 14 Payroll Taxes, Wealth, and Employment in Neoclassical Theory: Neutrality or Nonneutrality? 429 Hian Teck Hoon 15 Economic Culture and Economic Performance: What Light Is Shed on the Continent’s Problem? 447 Edmund S Phelps Index 483 253 323 413 Contributors Harvard University Philippe Aghion Harvard University Amar Bhidé New York University Roman Frydman Robert Gordon Northwestern University James Heckman University of Chicago Anders Hoffmann Singapore Management University Hian Teck Hoon Bas Jacobs FORA Erasmus University Rotterdam Harold James Omar Khan Princeton University Columbia University University of Chicago Ioana Marinescu Edmund Phelps Columbia University Andrzej Rapaczynski Richard Robb Jeffrey Sachs Columbia University Columbia University Columbia University Robert Shiller Yale University Hans-Werner Sinn Gylfi Zoega CESifo University of London Series Foreword This book is part of the CESifo Seminar Series The series aims to cover topical policy issues in economics from a largely European perspective The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at Ludwig-Maximilians-Universität, Munich, and the Ifo Institute for Economic Research All publications in this series have been carefully selected and refereed by members of the CESifo research network 486 Economic culture See also Cultural factors dimensions of, 453–55 and economic performance in continental Europe, 22–23, 447–50, 470–75 conceptual framework for study of, 450–55 data sources and definitions in, 477 and economic dynamism, 452–53, 478–79 statistical methodology in study of, 475–77 statistical tests on, 455–70 and “two cultures” view (Bourguinon), 472–73 and institutions, 449 Economic development, and technology adoption, 171 Economic dynamism, 451, 452–53 See also Innovation and accountability structures, 56 and effect of culture on performance in continental Europe, 452–53, 478–79 and European slowdown, 15–16, 450 as type of economy, 29 Economic freedoms, and economic performance, 12 Economic growth from adoption of entrepreneurial innovation, 330, 338 and human capital, 332 and macroeconomic policy, 223–24 and taxation, 387, 388, 407 supply–side arguments on, 387, 402–406 Economic growth in Europe, 27 and budget deficit cyclicality (OECD), 223, 224, 224–25, 225, 228, 230–31, 240–43 computation of countercyclicality for, 231–34 robustness tests for, 243–45 vs United States, 28–31 and entrepreneurship, 31, 33 (see also Entrepreneurship) Economic history(ies) and European development, 11–2 periods of change vs periods of consolidation in, 29 Index Economic institutions and economic performance on Continent and dynamism, 16 as suboptimal, Economic performance in continental Europe, 323 and belief in merit vs connections, 17 comparative evidence on, 3–13, 25n.11 disappointing decade for, and economic culture, 22–23, 447–50, 470–75 conceptual framework for study of, 450–55 data sources and definitions in, 477 and economic dynamism, 452–53, 478–79 statistical methodology in study of, 475–77 statistical tests on, 455–70 and “two cultures” view (Bourguinon), 472 “glorious years” of (1955–1975), 10–11, 14, 448 and lack of economic dynamism, 15–16, 323 subjective indicators of, 24 and welfare state, 12, 20–22 Economic systems and economic performance, 10 ever–changing complexity of, 210–11 and interventionism in economic policy, 448 neoclassical economic theory on, 1–2 spectrum of, 450–52 Edison, Thomas, 216n.10 Education funding of, 262–64 greater priority for preschool and primary, 309 and importance of early years, 289–90 increase in attainment of, 259–62 and innovation deficit in Europe, 88 liberal, 449 in model of transmission of ideas, 331 and adoption of foreign technologies, 325 and productivity growth, 330 rising returns to, 258–259 and technological diffusion, 201–202 and unemployment, 270 upstream innovation served by, 209 Index Education, business, as business environment area, 103, 126 Education, higher doctorates granted in US and rival countries, 173–74 and growth (model of transmission of ideas), 336, 338 subsidies for, 303–304 Education in entrepreneurship, as business environment area, 103, 126 Efficiency, vs equity, 308 at later vs earlier stages of life, 254 Eggertsson, Thrainn, Elbion AG, funding of, 76 Emerging market economies, and countercyclical fiscal policy, 226 Employee engagement, in various countries, 24 See also Job satisfaction Employer of last resort, state as, 396, 398 See also Communal jobs Employment protection and growth (model of transmission of ideas), 336 in statistical tests on economic culture, 457, 459, 461, 463, 465 in US vs Europe, 38–40 Employment relative to labor force, in statistical tests of economic culture, 467 Energy, and real GDP in Unied Stataes, 372–76 English–speaking economies (ES), 388 See also Taxation–growth relation in three groups of countries and fiscal distress, 405 as free societies, 403–404 government outlays in, 389, 391, 392 household saving rates of, 405 income inequality in, 402 per capita income of, 401 unemployment in, 398, 399 Enlightenment, 447, 470–71, 472 Enterprise Resource Planning (ERP) software, 186, 209–11, 211–14 Entitlements See Welfare systems and states Entrepreneurial business environment and creation of high–growth firms, 104–105, 107–10 defining and quantifying, 100–104, 124–30 487 and macroeconomic conditions, 101–102 quality of data for, 124 in EU vs US, 105–6 Entrepreneurial firms, as innovation users, 170 Entrepreneurial motivation as business environment area, 103, 130 as EU policy challenge, 112 Entrepreneurship, 31, 91, 92–93, 135, 147 as choice access to capital and effects of accountability in, 40–46 and capital markets, 47–48 and labor market, 37–40 and risk–taking differences (US vs America), 33–36 and continental creativity, 472 as corporate risk taking, 48, 50 accountability and control in, 54–56 and executive compensation, 56–59 and ownership structure, 50–53 and cultural factors, 37, 135, 323 cross–country differences in, 136–39 and economic culture, 23 and economic performance, 15–16 factors affecting, 100–102, 323 and favorable circumstances, 451, 480n.4 intuitive decisions in (“tacit knowledge”), 32, 41 in model of transmission of ideas, 327–29 and number of start–ups (EU and US), 94–97 and personal engagement, 480 and risk management, 135, 141–44, 147–48 and scientific enterprise, 136, 144–47, 148 in US vs continental Europe, 91, 92, 323 and US incomes lead, 192 venture capital role in, 65 (see also Venture capital firms) Entrepreneurship education as business environment area, 103, 126 as EU policy challenge, 111, 112, 113–14 Entrepreneurship infrastructure, as business environment area, 103, 127 488 Entry barriers/deregulation, as business environment area, 103, 125 Equality, vs incentives, 256–58 Equity vs efficiency, 308 at later vs earlier stages of life, 254 Equity–based financing, 40–41 ES See English–speaking economies Ethnic homogeneity, and social welfare state, 406 Euro.nm (stock market consortium), 48 Europe as globalization loser, 153 and governance structure of firms, 99–100 human capital in, 27, 254 insufficient utilization of, 253–54 policy on, 309 and skill use or maintenance, 255–56 as large open economy (payroll tax– hours worked relationship), 440–42 science funding in, 146, 147 unemployment in, 257, 275 use of advanced products in, 201 venture capital finance in, 66, 74–75, 88, 142 as EU policy challenge, 111, 112, 113–14 and European Commission, 65–66, 86, 142 and France–Luxembourg connection, 78–79, 80–81 and tax structure, 75–76, 77 and United Kingdom, 76–78 Europe, economic performance in See Economic performance in continental Europe European Central Bank, 223–24 European Council, and entrepreneurship, 91 European Institute of Technology, 175 European Investment Fund (EIF), 142 European Monetary Union (EMU) budget pressures for governments in, 262 and cyclicality of fiscal policy, 226 of budget deficit, 223, 225, 227, 236, 237, 239–40 and growth, 246 European Research Council (ERC), 147 European Stability and Growth Pact, 223 Index European standard of living compared with United States See Standard of living in Europe compared with United States European Union (Commission) enlargement of, 414 entrepreneurship promoted by, 91, 113 and business environment, 104–105, 107–10 and business environment compared with US, 105–106 and definition of entrepreneurship, 93 and high–growth firms, 99–100 and number of start–ups, 94–97 policy challenges in, 111–13, 114 questions on, 91–92 and relative importance of policy areas, 106–10 and relative importance of policy areas (data description), 114–23 fiscal discipline in, 157 IT productivity gains of, 198–99 and Lisbon agenda, 153 number of high–growth firms generated in, 97–99, 100 research spending in, 175 and venture capital, 65–66, 86, 142 European Union, core countries of (EC), 388, 408 See also Taxation–growth relation in three groups of countries and fiscal distress, 405 as free societies, 403–404 GDP of, 401 government outlays in, 389, 391, 392 household saving rates of, 405 income inequality in, 402 unemployment in, 398, 399 Euro–pessimists, 387, 388, 408 EUROSTAT Business Demography Project, 94 EUROSTAT database, 92, 96 Executive compensation, and corporate entrepreneurship, 56–59 Exit markets, as EU policy challenge, 111, 112, 113–14 Factor price convergence, 413, 414–15, 427 forces of, 415–18 Faggio–Nickell puzzle, 430, 443 Falck, Giorgio Enrico, 164 Family, 152 Index Family firms, 160–66 of Europe, 18 high growth unlikely in, 99–100 as risk averse, 61n.13 risk diversification lacking in, 50 Federal Express, 215n.5 Female labor force participation rates, 284, 308, 312–13n.10 in Europe, 351, 364–65 and home production practices in Europe vs United States, 369, 381 and participation of older workers, 287 and part–time jobs, 273 in United States, 349, 351 Financial development, and cyclicality of structural investments, 224, 241 for budget deficits, 238, 239, 245 and relation to growth, 228, 240, 243 Finland, 387 See also Nordic countries Fiorina, Carla, 164 Fiscal discipline, 157–58 Fiscal distress, as argument against welfare state, 403, 404–405 Fiscal incentives, as business environment area, 103, 128–29 Fiscal policy See Cyclicality and countercyclicality of budget deficit among OECD nations Fiserve, Inc., 143 Fitoussi, Jean–Paul, 473 Foreign ideas, adoption of, 326–27 Foreign markets, access to, as business environment area, 103, 125 FoxMeyer, 214 France, 388 See also European Union, core countries of family firms in, 162 malaise and decline in, 154–55, 156 Franklin, Benjamin, 137 Freedom, as argument against welfare state, 403–404 Freeman, Richard, 173, 174, 175, 176, 177, 188, 190 French Revolution, and innovative culture, 136–37 Friedman, Milton, 403 Gaenslen, Fritz, 138 Gains from trade after collapse of Communism, 413 reality of, 418–19 489 Gates, Bill, 215n.9 “Gazelles,” 93, 97 GDP, per person of working age, 7, GED recipients, and noncognitive abilities, 290 Geographic matching, of VCs and entrepreneurs, 79, 81–86 German model, of corporate governance, 55 German university model, 137 Germany, 388 See also European Union, core countries of export performance of, 423–24 low level of growth in, 418–19, 424 malaise in, 154–56 and outsourcing, 417–18 as scientific–research leader, 145 Giersch, Herbert, 12 Global Entrepreneurship Monitor (GEM) Project, 96–97 Globalization and Activating Social Assistance, 426 Europe as loser in, 153 for large vs small states, 153–54, 158 and late–19th–century state, 158–59 Nordic system jeopardized by, 407 pathological overreactions to, 421–24 reactions to in welfare state, 420–21 Goldman Sachs, 143 Google, 215n.9 Gordon, Robert, 13, 197, 199 Gore, W L., 214 Governance arrangements, in US vs Europe, 54–55, 99–100 German model, 55 Government funding, for scientific research, 145 Government purchases with no transfers, in payroll–taxes model, 435–37 Government regulation and innovation deficit in Europe, 88 and work hours per capita, 360 Government transfers, in payroll–taxes model, 437–39 Great Britain See United Kingdom Group–specific initiatives, as business environment area, 103, 130 Happiness research, Hausman test, 476–77, 480n.7 490 Hayek, Friedrich von, 12, 388, 403, 409n.15, 451, 455 Health care See Medical care in US Heckscher–Ohlin mechanism, 21 Hershey Foods, 214 Hewlett, William, 204 High–growth firms and business environment, 104–105, 107–10 as EU entrepreneurship key, 99, 113–14 generation of (entrepreneurial business environment), 104–105, 107–10 key policy areas for stimulating of, 99–100 measuring generation of, 97–99 Hofstede, Geert, 138 homepricefutures.com 143–44 Household production, and decline in working hours per capita, 369, 381 Housing, and real GDP in United States, 372 Human capital and comprehensive theory of skills, 292 model for, 293–300 policy impacts of, 300–307 and economic growth, 325, 332 in Europe, 27, 254 insufficient utilization of, 253–54 policy on, 309 and skill use or maintenance, 255–56 formation of in schools vs families, 313n.19 and taxation, 278 and innovations, 19 investment in and children from disadvantaged families, 291–92 complementarities from, 254, 255, 265, 285, 292, 296, 297, 299, 299–300, 306, 308, 309 and early vs late stages of life, 254, 288–89, 291, 308–309 educational, 297 equality–incentives tradeoff in, 257–58 implicit taxes on returns of, 308 insufficient motivation for, 307 and low–skilled workers, 265 and productivity growth, 268 and retirement, 306 Index as stagnant, 262 and taxation, 267–68 and technology of skill formation, 287–92 maintenance of, 308 policy on and early childhood intervention, 309 economic context of important, 254–55 importance of for Europe, 307 reinvention of required, 253, 254 skills contributing to, 256 creation of, 259–69 economic environment of, 256–59 formation of as cumulative, 255 mainland Europe’s problems with, 255–56 need to educate for, 254 utilization rate of, 307–308 and benefit entitlements, 273–75, 276 and decrease in working hours, 271–73 and distortions in labor markets, 309 and labor force participation, 269–71, 272 and labor market regulations, 273, 275, 277–78 and pensions or early retirement schemes, 285–87, 288 and retirement age, 281–85, 286, 308 welfare–state policies as lowering, 255 Humboldt, Alexander von, 137 Hume, David, 447 Hurd, Mark, 164 Ifo Institute, 425 Ignition Partners, 86 Imagine Communications, 86 Immigrants See also Migration Nordic model stressed by, 407 and real GDP in United States, 377 and social problems, 253, 307 Immigration policies, upstream innovation served by, 209 Implicit taxation See Taxation, implicit Incentives and entrepreneurship, 101 Index vs equality, 257 for training, 266 among low–skilled workers, 265–66 Income per capita of rich and poor (three groups of countries), 401–402 and social spending (three groups of countries), 400–401 Income redistribution, perverse, 309 Income taxes, personal, 280 as business environment area, 103, 128 Index–based derivatives, risk management through, 142–44, 148 India barriers to technology adoption in, 202 family firms in, 162 as globalization winner, 153–54 as market participant, 413 Industrial policy, in large states, 154 Inefficiency, and real GDP in United States, 376–77 Inequality of income, 256–57, 258–59 in three groups of countries, 401–402 Inflation targeting, and countercyclical budgetary policy, 225, 227, 238, 241, 244, 245–46 Information technology (IT) customers’ risks in, 185 and European Union, 170 and US productivity, 195, 197–99 US spending on, 193–95, 197 venturesome users of, 199–201, 204 Initial public offering (IPO), 47–48, 49, 65 Innovation See also Economic dynamism absorptive capacity for, 171 acquisition and use of (“downstream”), 169, 170–71 elusive underpinnings of, 201–205, 206 by venturesome consumers, 182–88 as argument against welfare state, 403, 405–406 and cultural differences, 136–39 and economic growth, 338 and education or immigration policies, 209 in established firms vs VC backed start– ups, 87–88 491 in Europe (short supply of), 65 as evolutionary, 180–82 and family firms in India and China, 162 free market system of, 188 and growth (Schumpeter), 178 and destruction, 178–79 and human capital, 19 (see also Human capital) and increased wealth, 21 in international trade, 188–92 managers’ role in diffusion of, 18 multiple factors in success of, 19 multiple players in, 180 private–ownership system structured for, 451 promoting diffusion of, 205 and risk, 31 in solidarist–influenced private– ownership system, 451–52 specialization in, 181–82, 215–16n.10 as system, 171–72 venture capital role in, 65 “Innovation market,” 328 Insecurity, and real GDP in United States, 376–77 Interest politics, 159 and large vs small states, 159 Interest rate, in relation of payroll tax to employment, 440–42, 443 Intergenerational equity, 152 International governance, and small vs large states, 158 International Swaps Dealers Association, 87 Internet bubble, and VC risk taking, 69, 72 Invention, and innovation, 180 Investment, and influx of new workers, 13 Investment Property Databank (IPD), 144 iPod, 192 Ireland, 154, 388 Iron Curtain, fall of, 413 Italy, 388 See also European Union, core countries of corporatist system of, 451 family firms in, 162 lack of VC funding in, 75 malaise in, 154–55, 156 492 James, William, 211, 454 Japan car companies in, 192 deficit increase in, 157–58 R&D investment of, 175 reconstruction and export–led boom of, 177 as rival, 172 superiority of alleged, 30 Jetelová, Magdelena, 155 Job involvement, on Continent, 5–6 Job satisfaction See also Employee engagement on Continent vs in comparator countries, 4–6 in various countries, 24 Job security, in Europe vs America, 38–40 Job training programs, 291 Jospin, Lionel, 156 JTPA program, US, 291 Kalman filter, 234, 246–48 Kant, Immanuel, 447 Kelly, Pat, 205 Kindleberger, Charles, 160 Koch, Christopher, 212, 213 Kohl, Helmut, 155 Korea, R&D investment of, 175 Korobov, Vladimir, 138 Labor force, participation rates in, 269 by age, 282 and pensions or early retirement schemes, 285–87, 288 and skill formation, 292 Labor market regulation as business environment area, 103, 129 as distortion–producing, 309 as EU policy challenge, 111, 112, 113–14 and labor market performance, 275, 277–78 and unemployment, 273 and utilization rates of human capital, 253–54 Labor markets demand as skill–based in, 264–65 and entrepreneurship, 37–40 equity–incentive tradeoff in, 256–57 in Europe and 1995 hours–per–capita and productivity turnaround, 370, 380, 382 Index rigidity of, 419–20 in model of transmission of ideas, 338 1995 hours–per–capita and productivity turnaround in, 344, 345–51, 355, 357, 363 Nordic countries’ employment strategy, 393 unskilled workers in, 253 Labor productivity, in statistical tests of economic culture, 467 Labor supply, and payroll tax, 429 for large open economy, 439–43 for small open economy, 432–39, 442 textbook model of, 430–32 Labor tax See Payroll tax; Taxation, labor Lagardère, Jean–Luc, and Lagardère dynasty, 165 Laissez–faire tradition, arguments of, 402–406 Lala.com, 86 Landes, David, 11, Lazonick, William, 161 Leadership See also Managers technological, 172–78 and upstream innovation, 169 Leisure demand for, 296 and level of human capital, 303 social vs market coordination of, 400 valuation of, 356, 357, 367, 367–70, 379, 380, 401 diminishing marginal value of, 366 Life–cycle profile of labor earnings, 305 Life satisfaction, and productivity level, Lifetime utility, maximizing of, 309–11 LignUp.com, 86 Lisbon agenda, 153, 175 Lisbon Summit (March 2000), Literacy, and educational attainment, 260 Loan labor, 426 Loans, as business environment area, 103, 127 Loebs, Terry, 14 London Futures and Options Exchange, 143 Louis XIV, on making money, 23 Lowenstein, George, 185, 186 Luxembourg holding company (“Luxco”), 78–79 Index Maastricht Treaty, 240 Macroeconomic policy, and economic growth, 223–24 See also Cyclicality and countercyclicality of budget deficit among OECD nations MacroMarkets LLC, 143, 144 Male participation rate, in statistical tests of economic culture, 466 Managerial jobs, growth in, 209 Managers in diffusion of innovation, 18 question of time spent examining new ideas, 324, 326, 338 Market(s), and state, 152, 160 Market forces, and growth slowdowns, 15 Marketing, in diffusion of innovations, 207–208 Markov chain Monte Carlo (MCMC) methods, 234, 246–48 See also AR(1) MCMC method Marx, Karl, 447 Massachusetts Institute of Technology, and practicality, 137 Masucci, Sam, 143, 144 McClelland, David, 138 McKinsey & Co., 170 Medical care in US private–sector inefficiency in, 394 wastefulness of, 345, 376–77 Medical entitlements, and growth slowdowns, 15 Merkel, Angela, 155 Messier, Jean–Marie, 165 Metropolis–Hastings (MH) sampler, 247–48 Metropolitan dispersion, and real GDP in United States, 372–76 Microcomputers, evolution of, 181 Middelhoff, Thomas, 165 Migration See also Immigrants and factor price convergence, 415–17 from France and Italy, 22 and unemployment, 421–22 Mincer equation, 297 Minimum–maximum method, in normalization of indicators, 104 Minimum wages, 253, 256–57 Model of skill formation, use and maintenance, 292–300 Mohn family, 165 Monsanto, 214 493 Moore, Gordon, 202 Moral hazard, 254 Moral relativism, 447 Moscatelli, Vittorio, 75 Motivation, and entrepreneurship, 101 Multinational corporation effect of on host countries, 201 faults of, 165 global supply chains of, 191–92 “National family perspective,” 358 National Science Foundation, 146, 147 National Venture Capital Association, 67 Nelson, Richard, 18, 171–72, 176–77 Neoclassical economic theory, 449–50, 450 Chicago school, 20 on “economic system,” 1–2 and evaluation of innovation, 185 and labor supply, 429 and labor taxation, 400 on social welfare systems, supply–side criticisms of Continent’s welfare systems, 12 Neo–neoclassical theory, 449–50 Netherlands, 388, 408n.1 See also European Union, core countries of New Zealand, 154, 388 See also English– speaking economies Nomad Jukebox, 192 Noncognitive abilities, 289, 290 Nondestructive creation, 178–80 Nordic (Scandinavian) countries, 387–88, 388–89, 451 See also Taxation– growth relation in three groups of countries Faggio–Nickell puzzle over, 430, 443 fiscal distress absent in, 404–405 as free societies, 403–404 government outlays in, 389, 391, 392 household saving rate of, 405 income inequality in, 402 as small open economies (payroll tax– hours worked relationship), 443 social welfare policies of, 393 and GDP, 400–401 labor market outcomes of, 396–400 poverty educed by, 394–96 question of solidity of, 406–407 technological excellence of, 405–406 unemployment in, 398, 399 North, Douglass, 448 494 North–South model and destructive creation, 179–80 “make where you innovate” assumption of, 192 and overseas innovation, 188, 189 and technological leadership, 173, 175–76, 178 Norway, 387 See also Nordic countries OECD, budget deficits of See Cyclicality and countercyclicality of budget deficit among OECD nations OECD range of social spending and taxation in, 387 Offshoring, 417 On–the–job training, 292, 297 Openness, and countercyclicality, 238, 241 Operating systems, sale of (worldwide comparisons), 193, 194–95 Opportunities, as entrepreneurship factor, 101 Outsourcing, 417 Ownership structure, and corporate entrepreneurship, 50–53 Packard, David, 204 Palmisano, Samuel, 165 Participation rate, male, in statistical tests of economic culture, 466 Pasetti, Giuseppe, 75 Patents, objections to filing for, 183–84 Payroll tax and labor supply (hours worked), 429–30 for large open economy, 439–43 for small open economy, 432–39, 442 textbook model of, 430–32 and unemployment, 278 Penn World Table, 477 Pensions and growth slowdowns, 15 and labor force participation of older workers, 285–87, 287 need to correct, 309 Perspectives on Technology (Rosenberg), 180 Peter I the Great (tsar of Russia), 189 Peugeot, Armand, 216n.10 Phelps, Edmund S., 18 Physicians Sales and Services company, 205 Index Pioneer New Media Technologies, 214 Polanyí, Michael, 451 Political factors, and institutional inefficiency, Political model, 448 Poverty, as reduced by social outlays (three groups of countries), 394–96 Poverty traps, 264, 307 Pre–entry of entrepreneurs, 114 Prestowitz, C., 172, 175, 190, 193 Private demand conditions, as business environment area, 103, 125 Private ownership, individualistic vs solidarist versions of, 451–52 Private wealth, in statistical tests of economic cultures, 468 Problem solving, resourceful, 187–88 Procurement regulation, as business environment area, 103, 126 Productivity in Anglo–Nordic vs major continental countries, 453 on Continent vs in comparator countries, 6–9 and entry of foreign workers, 13 in Europe vs United States, 198, 343, 348, 448 (see also Standard of living in Europe compared with United States) questions on criteria of, 9–10 as satisfaction of new wants, 179 of service sector, 191 and skills, 268 slowdowns in, 14 US gains in, 192–93, 195, 197–99 Productivity, labor, in statistical tests of economic culture, 467 Productivity growth and education, 330 in model of transmission of ideas, 329–30, 331, 332–33, 338 “Productivity paradox,” 197, 198 “Protestant ethic,” 447 Public good, scientific research as, 145 Public policy, and technology diffusion, 205–10 Public transit, and real GDP in United States vs Europe, 373–74 Purchasing power parities, Quarterly Census of Employment and Wages, 94 Index Questionnnaires, attitudinal and situational factors in, 139 Racial antagonisms, and redistribution policies, 406–407 Rational Institutions theory, 2–3 “Rat race” syndrome, 400 R&D, share of as related to cyclicality, 224 Real estate risks, derivative products for, 143–44 Real GDP pr capita, in Europe vs United States, 343 See also Standard of living in Europe compared with United States) Regionalism, 159 Regulation See Government regulation Religious orientation, and cross–country differences in high–growth firms, 99 Rent seeking by big European firms, 88 and corrupt state, 152 Replacement incomes, 13, 20–21, 273, 419–20, 427 in Germany, 424 Research on cyclicality and monetary policy, 246 danger of excess in, 171 on effect of economic culture, 471 Resourceful problem solving, 187–88 Restart possibilities as business environment area, 103, 126 as EU policy challenge, 111, 112, 113–14 Retailers, big–box, 197, 204, 374, 375 Retirement decreasing age of, 308 early, 306–307, 309, 351, 361, 367–70 implicit tax on, 306 Retirement ages, and skill depreciation, 281–85, 286, 308 Ricardo, David, 211 “Rise and Fall of American Technological Leadership, The” (Nelson and Wright), 176–77 Risk cross–country differences in attitudes toward, 139–40 in entrepreneurship, 31, 135 limitation of for venture capitalists, 73–74 unmeasurable and unquantifiable, 184–86 495 Risk management, 135 and entrepreneurship, 135, 141–44, 147–48 through index–based derivatives, 142–44, 148 through venture capital, 141–42, 147–48 Risk taking and corporate entrepreneurship, 48, 50 accountability and control in, 54–56 and executive compensation, 56–59 and ownership structure, 50–53 in Europe and America, 33–36 Road to Serfdom, The (von Hayek), 409n.15 Robb, Richard, 470 Roberts, Eric, 211–12 Rosenberg, 180 Russell Sage conference on altruism, 447 Russia, discontent in, 157 Sapir, André, 154 Savings, household, as argument against welfare state, 403, 405 Savings and investment, stimulation of, 208 Scandinavian countries See Nordic countries Schooling and on–the–job training, 292 in Protestant regions, 25–26n.12 Schröder, Gerhard, 155 Schumpeter, Joseph and “creative destruction,” 178 on “entrepreneurial spirit,” 447 on entrepreneurial spirit of Austrians, 472 and entrepreneurship, 11, 93, 181 and Initiative/Passivity dimension of culture, 455 on innovation, 87, 178, 180, 182, 451 Science, The Endless Frontier (Bush), 146 Scientific research encouragement of, 136, 144–47 and factor price convergence, 415 US decline in, 173–75 Scientism, 23, 452, 455 Seillière, Ernest–Antoine, 165 Selection Principle (Sinn), Self–employment rate, and economic performance, 93 496 “Self–made man,” in US vs Europe, 37, 112–13 Service sector, productivity of, 191 787 Dreamliner, 88 Signaling theory, on geographic affinity of VCs and entrepreneurs, 84, 85–86 Singapaore, 154 Sinn, Hans–Werner, 3, 155 Skill(s) See also Human capital as entrepreneurship factor, 101 loss of during unemployment, 359 Skill creation, 259–69 and skill–based demand for labor, 264–65 Skill formation, 19 technology of, 287–92 Skill formation, use and maintenance, theory of, 292–300 policy impacts of, 300–307 Skill maintenance, 281–87 Skill utilization, 269–81, 307–308 Small Business Administration (SBA), 94 Smith, Adam, 201, 211, 447, 448 Social expenditures (outlays) and economic health, 387 in three groups of countries, 389–96 Socialism, Hayek’s changed view of, 409n.15 Social model, 20, 448 Social partners, protection of, 23, 452 Social problems, among unskilled persons, 253 Social prosperity, multiple dimensions of, 28 Social security discrimination, as business environment area, 103, 129 Social wealth as private wealth vs payroll–tax beneficiary, 430 relative importance of, 430 in statistical tests of economic culture, 468 Social welfare systems See Welfare systems and states Solow, Robert, 195 South Korea, 154 Soviet Union business–oriented attitudes in, 138 as technological also–ran, 202 Specialization and factor price convergence, 417 reality of, 418–19 Index horizontal, 417, 422–23 unfavorable outcomes of, 422–24 vertical, 417, 423–24 Staged financing, and venture–capital firms, 141 Stakeholders, 23, 452 Standard of living in Europe compared with United States, 343, 377–83 and explanations for declining hours per capita, 351, 355, 356, 363–65 from age distribution of unemployment and labor force participation, 351–55 and evaluation of leisure, 356–57 labor taxes, 357–58, 361–63 unionization and regulation, 360–61, 363, 382 welfare state, 358–60, 381 and mis–measurement of US real GDP, 372 in energy and metropolitan dispersion, 372–76 in housing, 372 from immigration and underground economy, 377 from insecurity and inefficiency, 376–77 and 1995 turnaround in hours–per– capita and productivity, 344, 345–51, 355, 357, 363, 370, 380, 382 and “time effects,” 364, 382–83 and “unmeasured leisure” hypothesis, 343–44, 348 and wasted production in US, 344–45 and welfare implications of decline in hours per capita, 365 cost of higher unemployment, 366–67, 380–81 early retirement and valuation of leisure, 367–70, 380 idle youth, 370 and welfare evaluation of work vs leisure, 370–72 Standard & Poor’s, 143 Standout countries on Continent, Start–up firms number of (EU and US), 94–97 question of definition of, 94 State, and markets, 152, 160 State ownership in Europe, 51 and risk taking, 50 Index Statistics Denmark, 92, 96 Stock market, weakness of, 449 Stock market capitalization, and growth (model of transmission of ideas), 336 Stock markets and buyouts, as business environment area, 103, 128 Subsidies for education, 267–68 higher education, 303 wage, 202, 292, 424–27 Supply–side viewpoint, 387 arguments of, 402–406 Sutton, Willie, 191 Swaps, 142 Sweden, 387 See also Nordic countries Switzerland, 156 Syndication methods, and venture– capital firms, 141 Systems competition, market failure in, Taiwan, 154 Taxation and characteristics of social outlays, 393–94 as EU policy challenge, 112, 114 and growth, 387, 388, 407 supply–side arguments on, 387 on human capital formation, 307 and labor market performance, 278–81 in Nordic countries, 407 vs core European countries, 405, 408 and poverty reduction through social outlays, 394–96, 397 and reduction in working hours, 271 and skill formation, 266–68 and utilization rates of human capital, 253–54 Taxation, business, as business environment area, 103, 128–29 Taxation, capital, as business environment area, 103, 128 Taxation, implicit, 254, 301, 308, 314n.29 cross–country plotting of, 288 and early retirement schemes, 286–87, 298 on retirement, 298, 302, 306 and skill formation, 255, 307 Taxation, income, 280 as business environment area, 103, 128 497 Taxation, labor See also Payroll tax and decline in European working hours, 349, 356, 356–57, 381 impact of, 301, 303 and OJT, 306 in statistical tests on economic culture, 457, 459, 461, 463, 465 and working hours, 400 Taxation, personal, as business environment area, 103, 128 Taxation, wealth and bequest, as business environment area, 103, 127 Taxation–growth relation in three groups of countries, 387–88, 407 and arguments against welfare state, 402–406 and labor–market outcomes of Nordic social welfare policies, 396–400 and levels of social outlays, 389–93 and per capita income of rich and poor, 401–402 and social spending effect on GDP, 400–401 Tax credits, for capital outlays, 208–209 Tax multiplier effect, 344, 381 Tax rate and innovation deficit in Europe, 88 on payrolls, 20, 21 Tax structures, and European venture capital, 75–76, 77 and France–Luxembourg connection, 78–79, 80–81 and United Kingdom, 76–78 “Techno–fetishism,” 19, 169 Technological knowledge, and factor price convergence, 415 Technological leadership, 172–78 Technological progress, belief in, 202 Technology, of skill formation, 287–92 Technology adoption barriers to, 201–202 and economic development, 171 Technology diffusion, and education, 201–202 Technology transfer as business environment area, 103, 125 “Techno–nationalism,” 169 Tenure in jobs, on Continent vs comparator countries, 25n.6 Thatcher, Margaret, 151 Theory of Capitalist Development, The (Schumpeter), 181–82 498 Theory of the Leisure Class (Veblen), 203 Theory of skill formation, use and maintenance, 292 model for, 293–300 policy impacts of, 300–307 Thrift belief in, 203–204 and labor force participation rates, 14 Time effects, in changes of work hours per capita, 364, 382–83 Tocqueville, Alexis de 447, 470, 473 Tolentino, Cristina, 75 Total Entrepreneurial Activity (TEA), 96–97 Total factor productivity, See also Productivity Total factor productivity growth, 338–40 Training for low–skilled workers, weak incentives for, 265 Transmission of entrepreneurial ideas between and within countries, 323, 338 model of, 323–24 and adoption of foreign ideas, 326–27 empirical evidence on, 331–38 entrepreneurship in, 327–29 and local manager’s role, 324–26 and productivity growth, 329–30 Tull, Bob, 144 Twain, Mark, and death of social welfare state, 408 Uncertainty and entrepreneurship, 184 and family firms, 161, 162 on institutional innovations, Unemployment and benefit entitlements, 273 comparative data on, and countercyclical policies, 225 and education level, 269–70 and entrepreneurship, 101 in Europe, 275, 382 among low–income workers, 257 welfare state of, 359–60 from increases in working–age population, 13 and job tenure, 39 and labor market regulations, 273 and migration, 421–22 Index real vs official rates of, 270 and replacement incomes, 13, 20–21, 420, 427 and social model, 20 from specialization, 423 state–financed, 418–19 in statistical tests on economic culture, 463, 465 in three groups of countries, 398 and wage rigidity, 7–9 and wealth/wages ratio, 13–14 welfare cost of increase in, 366–67 Unions and unionization and reduction in working hours, 271, 356, 360, 363, 382 and rise in tax rates, 278 and wage rigidity, 419 United Kingdom, 388, See also English– speaking economies and countercyclicality of budget deficit, 227, 236, 237, 238, 246 and family firms, 162, 162–63 IT employees in, 200 and scientific research, 175 United States, 388 See also English– speaking economies attitudes toward entrepreneurship in, 112–13 business competition in, 34–35 concerns over entrepreneurial culture of, 136 and countercyclicality of budget deficit, 227, 235, 236, 237, 238 deficits in, 157–158 despondent period in, 27–28 vs Europe in access to capital, 43–46 in economic growth, 28–31 in entrepreneurship, 31, 33, 91, 92, 323 in environmental business environment, 105–106 in executive compensation 57–59 in governance arrangements, 54–55, 99–100 in labor markets, 37–40 in ownership structure, 51–53 in productivity gains, 198, 343, 348, 448 in returns to education, 264 in risk taking, 33–36 Index in standard of living, 343 (see also Standard of living in Europe compared with United States) in venture capital , 65 and European postwar performance, 10–11 and family firms, 162, 163 as incomes leader, 192–93 and IT consumption patterns, 193–95, 196 and productivity gains, 195, 197–99 inequality in, 256–57 IT spending of, 193, 197 mis–measurement of real GDP in, 372–77 number of high–growth firms generated in, 97–99, 100 number of start–ups in, 94–97 poverty rate in, 395 practicality admired in, 137 “productivity slowdown,” 172 scientific research in, 146, 146–47 self–employment preference stronger in, 16–17 social expenditures in, 394 and technological leadership, 172–75, 190 venture capital finance in, 66, 67–74, 88, 141, 142 and age of investee companies, 68 and early exit, 72–73 and Internet bubble, 69, 72 risk limitation for, 73–74 “Unmeasured leisure” hypothesis, 343–44, 348 Unskilled workers, 253 and welfare–state dependency, 253 Utility function, 432, 433 Values, in workplace, 22 Veblen, Thorstein, 203 Venture capital firms (VCs), 17, 18, 42, 60n.9, 65–66 as business environment area, 103, 128 vs established firms as promoting innovation, 87–88 in Europe, 66, 74–75, 88, 142 as EU policy challenge, 111, 112, 113–14 and European Commission, 65–66, 86, 142 499 and France–Luxembourg connection, 78–79, 80–81 and tax structure, 75–76, 77 and United Kingdom, 76–78 exit option for, 47 geographic matching of entrepreneurs with, 79, 81–86 governance structures of (US vs Europe), 44 and R&D, 215 risk management through, 141–42, 147–48 sectoral distribution of investments by (US vs Europe), 45, 46 sources of funds for (US vs Europe), 43 in United States, 66, 67–74, 88, 141, 142 and age of investee companies, 68 and early exit, 72–73 and Internet bubble, 69, 72 risk limitation for, 73–74 Venturesome consumption, 170, 171, 182–88, 192–93, 202–205, 208 of IT users, 199–201, 204 Vesting programs, and venture–capital firms, 141 Virgil, quoted, Volkswagen, 214 Von Hippel, Eric, 183 Wage cost, for West vs ex–communist countries, 414 Wage flexibility, under wage–subsidies system, 426 Wage rigidity and unemployment, 7–9 and unions, 419–20 Wages See also Compensation of labor on Continent, 9–10 minimum, 253, 256–57 Wage subsidies, 202, 292, 424–27 Wal–Mart, 197, 204, 208, 375 Wealth, private, in statistical tests of economic culture, 468 Wealth, social See Social wealth Wealth adjustment, and relation of payroll taxes to labor supply, 430 Wealth/wages ratio, 13–14, 21, 430, 440, 443 Weber, Max, 11, 25n.12, 203, 208, 211, 447, 472 500 Weiss, Allan, 143, 144 Welfare systems and states, 307 arguments against, 402–406 Bismarck’s invention of, 158–59 and calculation of real per–capita income, 345 dependency in, 253 as disincentive, 307 and economic performance, 1, 2, 12, 20–22 and comparative evidence, 10 and ethnic homogeneity, 406 and globalization, 419–21 and hours per capita in Europe, 358–60, 362, 381 and human capital investments (implicit tax burdens on), 254–55 improvement of (through wage subsidies), 424–27 replacement incomes in, 13 and unemployment, Whirlpool, 214 Wiener, Martin, 151 Women in workforce See Female labor force participation rates Worker–owned firms, as risk averse, 50 Work ethic, erosion of, 275 Work hours per capita (Europe) in comparison of three groups of countries, 398, 400 decrease in (explanations), 351, 355, 356, 363–65 from age distribution and labor force distribution, 351–55 and evaluation of leisure, 356–57 from labor taxes, 357–58, 361–63, 381, 429–30 from unionization and regulation, 360–61, 363, 382 from welfare state, 358–60, 381 and tax–rate level, 344 welfare implications of decline in, 365 cost of higher unemployment, 366–67, 380–81 early retirement and valuation of leisure, 367–70, 380 idle youth, 370 and welfare evaluation of work vs leisure, 370–72 Index World Values Surveys (WVS), 475 Wright, Gavin, 176–77 Zegna, Ermenigildo, 163–64 Zhirinovsky, Vladimir, 157 ... those of the member countries of the OECD—have the impression that most, if not all, of the ones in continental western Europe have performance characteristics that are worse on the whole than the. .. Sinn performance: the compensation of labor, out of which comes the paycheck and the “social contributions” for the employee The wage data here suggest that hourly total compensation on the Continent... at understanding and confronting with data the various constituent ideas in the thesis of structural underperformance characteristics of the continental economies perhaps the first such effort