Cyclopedia Of Economics 3rd edition

The Dutch proudly point to their current rate of unemployment at less than 2%. Labour force participation is at a historically high 74% (although in potential man-hour terms it stands at 62%). France is as hubristic with its labour policies - the 35 hours week and the earlier reduction in employers' participation in social contributions. Employment is sharply up in a host of countries with liberalized labour markets - Britain, Spain, Ireland, Finland. The ECB brags that employment in the euro zone has been rising faster than in the USA since 1997.

This is a bit misleading. Euro zone unemployment is far higher and labour force participation far lower than America's. The young are especially disadvantaged. Only Britain is up to American standards. The European labour market is highly inefficient in matching demand and supply. Labour mobility among regions and countries is glacial and generous unemployment benefits are a disincentive to find a job.

Reforms are creeping into the legislative agendas of countries as diverse as Italy and Germany. Labour laws are re-written to simplify hiring and firing practices and to expand the role of private employment agencies. But militant unions - such as Germany's IG Metal - threaten to undo all the recent gains in productivity and wage restraint.

The European Commission - a bastion of "social Europe" - has just equalized the rights and benefits of temporary workers (with more than 6 weeks of tenure) and full-time ones. Yet another reformist adviser to the Italian Minister of Labour was assassinated. This was followed by a million-workers strong demonstration in Rome's Circo Massimo against minor reforms in firing practices.

But the most successful and efficient labour market in the world, in the States, is associated with a different ethos and an idiosyncratic sociology of work. The frame of mind of the American employee and his employer is fundamentally at odds with European mentality. In Europe, one is entitled to be employed, it is a basic human right and a public good. Employers - firms and businessmen - are parties to a social treaty within a community of stakeholders with equipotent rights. Decisions are reached by consensus and consultation. Peer pressure and social oversight are strong.

Contrast this with the two engines of American economic growth: entrepreneurship and workaholism.

The USA, according to the "Global Entrepreneurship Monitor", is behind South Korea and Brazil in entrepreneurial activity prevalence index. But 7 percent of its population invested an average of $4000 per person in start-ups in 2000.

A 10-country study conducted in 1997-9 by Babson College, the London School of Business, and the Kauffman Center for Entrepreneurial Leadership found gaping disparities between countries. More than 8 percent of all Americans started a new business - compared to less than 1.5 percent in Finland. Entrepreneurship accounted for one third of the difference in economic growth rates among the surveyed countries.

Entrepreneurship is a national state of mind, a vestige of the dominant culture, an ethos. While in Europe bankruptcy is a suicide-inducing disgrace bordering on the criminal - in the USA it is an integral and important part of the learning curve. In the USA, entrepreneurs are social role models, widely admired and imitated. In Europe they are regarded with suspicion as receptacles of avarice and non-conformity. It is common in the States to choose entrepreneurship as a long-term career path. In Europe it is considered professional suicide.

In the USA, entrepreneurs are supported by an evolved network of financial institutions and venues: venture capital (VC), Initial Public Offerings (IPO's) in a multitude of stock exchanges, angel investors, incubators, technological parks, favourable taxation of stock options, and so on. Venture capitalists invested $18 billion in start-ups in 1998, $48 in 1999, almost $100 billion in 2000.

The dot.com crash deflated this tsunami - but only temporarily. US venture capitalists still invest four times the average of their brethren elsewhere - c. 0.5 percent of GDP. This translates to an average investment per start up ten times larger than the average investment outside America.

American investors also power the VC industry in the UK, Israel, and Japan. A Deloitte Touche survey conducted last month (and reported in the Financial Times) shows that a whopping 89 percent of all venture capitalists predict an increase in the value of their investments and in their exit valuations in the next 6 months.

Entrepreneurs in the USA still face many obstacles - from insufficient infrastructure to severe shortages in skilled manpower. The July 2001 report of the National Commission on Entrepreneurship (NCOE) said that less than 5 percent of American firms that existed in 1991 grew their employment by 15 percent annually since, or doubled their employment in the feverish markets of 1992-7. But the report found high growth companies virtually everywhere - and most of them were not "hi-tech" either. Start-ups capitalized on the economic strengths of each of the 394 regions of the USA.

As opposed to the stodgy countries of the EU, many post-communist countries in transition (e.g., Russia, Estonia) have chosen to emulate the American model of job creation and economic growth through the formation of new businesses. International financial institutions - such as the EBRD and the World Bank - provided credit lines dedicated to small and medium enterprises in these countries. As opposed to the USA, entrepreneurship has spread among all segments of the population in Central and Eastern Europe.

In a paper, prepared for USAID by the IRIS Centre in the University of Maryland, the authors note the surprising participation of women - they own more than 40% of all businesses established between 1990-7 in Hungary and 38% of all businesses in Poland.

Virtually all governments, east and west, support their "small business" or "small and medium enterprises" sector.

The USA's Small Business Administration had its loan guarantee authority cut by half - yet to a still enviable $5 billion in FY 2003. But other departments have picked up the slack.

The US Department of Agriculture (USDA) beefed up its Rural Business-Cooperative Service. The Economic Development Administration (EDA) supports "economically-distressed areas, regions, and communities". The International Trade Administration (ITA) helps exporters - as do OPIC (Overseas Private Investment Corporation), the US Commercial Service, the Department of Commerce (mainly through its Technology Administration), the Minority Business Development Agency, the US Department of Treasury, and a myriad other organizations - governmental, non-governmental, and private sector.

Another key player is academe. New proposed bipartisan legislation will earmark $20 million to encourage universities to set up business incubators. Research institutes all over the world - from Israel to the UK - work closely with start-ups and entrepreneurs to develop new products and license them. They often spawn joint ventures with commercial enterprises or spin-off their own firms to exploit technologies developed by their scientists.

MIT's Technology Licensing Office processes two inventions a day and files 3-5 patent applications a week. Since 1988, it started 100 new companies. It works closely with the Cambridge Entrepreneurship Center (UK), the Asian Entrepreneurship Development Center (Taiwan), the Turkish Venture Capital Association, and other institutions in Japan, Israel, Canada, and Latin America.

This is part of a much larger wave of in-house corporate innovation dubbed "intrapreneurship". The most famous example is "Post-It" which was developed, in-house, by a 3M employee and funded by the company. But all major and medium American firms encourage institutionalized intrapreneurship.

Entrepreneurship and intrapreneurship are often associated with another American phenomenon - the workaholic. Bryan Robinson in his 1998 tome, "Chained to the Desk", identifies four types of workaholism (or "work addiction"):

1. 
   The Bulimic Workaholic Style - "Either I do it perfectly or not at all";
   
2. 
   The Relentless Workaholic Style - "It has to be finished yesterday";
   
3. 
   Attention-Deficit Workaholic Style - adrenaline junkies who use work as a focusing device;
   
4. 
   Savouring Workaholic Style - slow, methodical, and overly scrupulous workers.
   

Even before the introduction of the 35 hours week in France, Americans worked 5 weekly hours more than the French, according to a 1998 study by the Families and Work Institute. Americans also out-worked the industrious Germans by 4 hours and the British by 1 hour. The average American work week has increased by 10% (to 44 weekly hours) between 1977-98.

One third of all American bring work home, yet another increase of 10% over the same period. According to the Economic Policy Institute, Germans (and Italians) took 42 days of vacation a year in 1998 - compared to 19 days taken by Americans. This figure may have since deteriorated to 13 annual vacation days. Even the Japanese take 25 days a year.

In a survey conducted by Oxford Health Plans, 34 percent of all respondents described their jobs as "pressing and with no downtime". Thirty two percent never left the building during the working day and had lunch at their desk. Management promotes only people who work late, believed a full one seventh.

Most Europeans - with the notable exception of the British - regard their leisure and vacation times as well as time dedicated to family and friends as important components in a balanced life - no less important than the time they spend at work. They keep these realms strictly demarcated.

Work addiction is gradually encroaching on the European work scene as well. But many Europeans still find American - and, increasingly British - obsession with work to be a distasteful part of the much derided "Anglo-Saxon" model of capitalism. They point at the severe health problems suffered by workaholics - three times as many heart failures as their non-addicted peers.

More than 10,000 workers died in 1997 in Japan from work-stress related problems ("Karoshi") . The Japanese are even more workaholic than the Americans - a relatively new phenomenon there, according to Testsuro Kato, a professor of political science in Hitotsubashi University.

But what is the impact of all this on employment and the shape of labour?

The NCOE identifies five common myths pertaining to entrepreneurial growth companies:

1. 
   The risk taking myth - "Most successful entrepreneurs take wild, uncalculated risks in starting their companies".
   
2. 
   The hi-tech invention myth - "Most successful entrepreneurs start their companies with a breakthrough invention - usually technological in nature".
   
3. 
   The expert myth - "Most successful entrepreneurs have strong track records and years of experience in their industries".
   
4. 
   The strategic vision myth - "Most successful entrepreneurs have a well-considered business plan and have researched and developed their ideas before taking action".
   
5. 
   The venture capital myth - "Most successful entrepreneurs start their companies with millions in venture capital to develop their idea, buy supplies, and hire employees".
   

Small businesses absorbed many of the workers made redundant in the corporate downsizing fad of the 1980's. They are the backbone of the services and knowledge economy. Traditional corporations often outsource many of their hitherto in-house functions to such nascent, mom-and-pop, companies (the "virtual corporation"). Small and medium businesses network extensively, thus reducing their overhead and increasing their flexibility and mobility. The future belongs to these proliferating small businesses and to those ever-fewer giant multinationals which will master the art of harnessing them.

At the other extreme are religious literalists who regard Man as the crown of creation with complete dominion over nature and the right to exploit its resources unreservedly. Similar, veiled, sentiments can be found among scientists. The Anthropic Principle, for instance, promoted by many outstanding physicists, claims that the nature of the Universe is preordained to accommodate sentient beings - namely, us humans.

Industrialists, politicians and economists have only recently begun paying lip service to sustainable development and to the environmental costs of their policies. Thus, in a way, they bridge the abyss - at least verbally - between these two diametrically opposed forms of fundamentalism. Similarly, the denizens of the West continue to indulge in rampant consumption, but now it is suffused with environmental guilt rather than driven by unadulterated hedonism.

Still, essential dissimilarities between the schools notwithstanding, the dualism of Man vs. Nature is universally acknowledged.

Modern physics - notably the Copenhagen interpretation of quantum mechanics - has abandoned the classic split between (typically human) observer and (usually inanimate) observed. Environmentalists, in contrast, have embraced this discarded worldview wholeheartedly. To them, Man is the active agent operating upon a distinct reactive or passive substrate - i.e., Nature. But, though intuitively compelling, it is a false dichotomy.

Man is, by definition, a part of Nature. His tools are natural. He interacts with the other elements of Nature and modifies it - but so do all other species. Arguably, bacteria and insects exert on Nature far more influence with farther reaching consequences than Man has ever done.

Still, the "Law of the Minimum" - that there is a limit to human population growth and that this barrier is related to the biotic and abiotic variables of the environment - is undisputed. Whatever debate there is veers between two strands of this Malthusian Weltanschauung: the utilitarian (a.k.a. anthropocentric, shallow, or technocentric) and the ethical (alternatively termed biocentric, deep, or ecocentric).

First, the Utilitarians.

Economists, for instance, tend to discuss the costs and benefits of environmental policies. Activists, on the other hand, demand that Mankind consider the "rights" of other beings and of nature as a whole in determining a least harmful course of action.

Utilitarians regard nature as a set of exhaustible and scarce resources and deal with their optimal allocation from a human point of view. Yet, they usually fail to incorporate intangibles such as the beauty of a sunset or the liberating sensation of open spaces.

"Green" accounting - adjusting the national accounts to reflect environmental data - is still in its unpromising infancy. It is complicated by the fact that ecosystems do not respect man-made borders and by the stubborn refusal of many ecological variables to succumb to numbers. To complicate things further, different nations weigh environmental problems disparately.

Despite recent attempts, such as the Environmental Sustainability Index (ESI) produced by the World Economic Forum (WEF), no one knows how to define and quantify elusive concepts such as "sustainable development". Even the costs of replacing or repairing depleted resources and natural assets are difficult to determine.

Efforts to capture "quality of life" considerations in the straitjacket of the formalism of distributive justice - known as human-welfare ecology or emancipatory environmentalism - backfired. These led to derisory attempts to reverse the inexorable processes of urbanization and industrialization by introducing localized, small-scale production.

Social ecologists proffer the same prescriptions but with an anarchistic twist. The hierarchical view of nature - with Man at the pinnacle - is a reflection of social relations, they suggest. Dismantle the latter - and you get rid of the former.

The Ethicists appear to be as confounded and ludicrous as their "feet on the ground" opponents.

Biocentrists view nature as possessed of an intrinsic value, regardless of its actual or potential utility. They fail to specify, however, how this, even if true, gives rise to rights and commensurate obligations. Nor was their case aided by their association with the apocalyptic or survivalist school of environmentalism which has developed proto-fascist tendencies and is gradually being scientifically debunked.

The proponents of deep ecology radicalize the ideas of social ecology ad absurdum and postulate a transcendentalist spiritual connection with the inanimate (whatever that may be). In consequence, they refuse to intervene to counter or contain natural processes, including diseases and famine.

The politicization of environmental concerns runs the gamut from political activism to eco-terrorism. The environmental movement - whether in academe, in the media, in non-governmental organizations, or in legislature - is now comprised of a web of bureaucratic interest groups.

Like all bureaucracies, environmental organizations are out to perpetuate themselves, fight heresy and accumulate political clout and the money and perks that come with it. They are no longer a disinterested and objective party. They have a stake in apocalypse. That makes them automatically suspect.

Bjorn Lomborg, author of "The Skeptical Environmentalist", was at the receiving end of such self-serving sanctimony. A statistician, he demonstrated that the doom and gloom tendered by environmental campaigners, scholars and militants are, at best, dubious and, at worst, the outcomes of deliberate manipulation.

The situation is actually improving on many fronts, showed Lomborg: known reserves of fossil fuels and most metals are rising, agricultural production per head is surging, the number of the famished is declining, biodiversity loss is slowing as do pollution and tropical deforestation. In the long run, even in pockets of environmental degradation, in the poor and developing countries, rising incomes and the attendant drop in birth rates will likely ameliorate the situation in the long run.

Yet, both camps, the optimists and the pessimists, rely on partial, irrelevant, or, worse, manipulated data. The multiple authors of "People and Ecosystems", published by the World Resources Institute, the World Bank and the United Nations conclude: "Our knowledge of ecosystems has increased dramatically, but it simply has not kept pace with our ability to alter them."

Quoted by The Economist, Daniel Esty of Yale, the leader of an environmental project sponsored by World Economic Forum, exclaimed:

"Why hasn't anyone done careful environmental measurement before? Businessmen always say, ‘what matters gets measured'. Social scientists started quantitative measurement 30 years ago, and even political science turned to hard numbers 15 years ago. Yet look at environmental policy, and the data are lousy."

Nor is this dearth of reliable and unequivocal information likely to end soon. Even the Millennium Ecosystem Assessment, supported by numerous development agencies and environmental groups, is seriously under-financed. The conspiracy-minded attribute this curious void to the self-serving designs of the apocalyptic school of environmentalism. Ignorance and fear, they point out, are among the fanatic's most useful allies. They also make for good copy.

Conservative sociologists self-servingly marvel at the peaceful proximity of abject poverty and ostentatious affluence in American - or, for that matter, Western - cities. Devastating riots do erupt, but these are reactions either to perceived social injustice (Los Angeles 1965) or to political oppression (Paris 1968). The French Revolution may have been the last time the urban sans-culotte raised a fuss against the economically enfranchised.

This pacific co-existence conceals a maelstrom of envy. Behold the rampant Schadenfreude which accompanied the antitrust case against the predatory but loaded Microsoft. Observe the glee which engulfed many destitute countries in the wake of the September 11 atrocities against America, the epitome of triumphant prosperity. Witness the post-World.com orgiastic castigation of avaricious CEO's.

Envy - a pathological manifestation of destructive aggressiveness - is distinct from jealousy.

The New Oxford Dictionary of English defines envy as:

"A feeling of discontented or resentful longing aroused by someone else's possessions, qualities, or luck ... Mortification and ill-will occasioned by the contemplation of another's superior advantages."

Pathological envy - the fourth deadly sin - is engendered by the realization of some lack, deficiency, or inadequacy in oneself. The envious begrudge others their success, brilliance, happiness, beauty, good fortune, or wealth. Envy provokes misery, humiliation, and impotent rage.

The envious copes with his pernicious emotions in five ways:

1. 
   They attack the perceived source of frustration in an attempt to destroy it, or "reduce it" to their "size". Such destructive impulses often assume the disguise of championing social causes, fighting injustice, touting reform, or promoting an ideology.
   

2. 
   They seek to subsume the object of envy by imitating it. In extreme cases, they strive to get rich quick through criminal scams, or corruption. They endeavor to out-smart the system and shortcut their way to fortune and celebrity.
   

3. 
   They resort to self-deprecation. They idealize the successful, the rich, the mighty, and the lucky and attribute to them super-human, almost divine, qualities. At the same time, they humble themselves. Indeed, most of this strain of the envious end up disenchanted and bitter, driving the objects of their own erstwhile devotion and adulation to destruction and decrepitude.
   

4. 
   They experience cognitive dissonance. These people devalue the source of their frustration and envy by finding faults in everything they most desire and in everyone they envy.
   

5. 
   They avoid the envied person and thus the agonizing pangs of envy.
   

In his book, "Facial Justice", Hartley describes a post-apocalyptic dystopia, New State, in which envy is forbidden and equality extolled and everything enviable is obliterated. Women are modified to look like men and given identical "beta faces". Tall buildings are razed.

Joseph Schumpeter, the prophetic Austrian-American economist, believed that socialism will disinherit capitalism. In "Capitalism, Socialism, and Democracy" he foresaw a conflict between a class of refined but dirt-poor intellectuals and the vulgar but filthy rich businessmen and managers they virulently envy and resent. Samuel Johnson wrote: "He was dull in a new way, and that made many people think him great." The literati seek to tear down the market economy which they feel has so disenfranchised and undervalued them.

Hitler, who fancied himself an artist, labeled the British a "nation of shopkeepers" in one of his bouts of raging envy. Ralph Reiland, the Kenneth Simon professor of free enterprise at Robert Morris University, quotes David Brooks of the "weekly Standard", who christened this phenomenon "bourgeoisophobia":

"The hatred of the bourgeoisie is the beginning of all virtue' - wrote Gustav Flaubert. He signed his letters 'Bourgeoisophobus' to show how much he despised 'stupid grocers and their ilk ... Through some screw-up in the great scheme of the universe, their narrow-minded greed had brought them vast wealth, unstoppable power and growing social prestige."

Reiland also quotes from Ludwig van Mises's "The Anti-Capitalist Mentality":

"Many people, and especially intellectuals, passionately loathe capitalism. In a society based on caste and status, the individual can ascribe adverse fate to conditions beyond his control. In ... capitalism ... everybody's station in life depends on his doing ... (what makes a man rich is) not the evaluation of his contribution from any 'absolute' principle of justice but the evaluation on the part of his fellow men who exclusively apply the yardstick of their personal wants, desires and ends ... Everybody knows very well that there are people like himself who succeeded where he himself failed. Everybody knows that many of those he envies are self-made men who started from the same point from which he himself started. Everybody is aware of his own defeat. In order to console himself and to restore his self- assertion, such a man is in search of a scapegoat. He tries to persuade himself that he failed through no fault of his own. He was too decent to resort to the base tricks to which his successful rivals owe their ascendancy. The nefarious social order does not accord the prizes to the most meritorious men; it crowns the dishonest, unscrupulous scoundrel, the swindler, the exploiter, the 'rugged individualist'."

In "The Virtue of Prosperity", Dinesh D'Souza accuses prosperity and capitalism of inspiring vice and temptation. Inevitably, it provokes envy in the poor and depravity in the rich.

With only a modicum of overstatement, capitalism can be depicted as the sublimation of jealousy. As opposed to destructive envy - jealousy induces emulation. Consumers - responsible for two thirds of America's GDP - ape role models and vie with neighbors, colleagues, and family members for possessions and the social status they endow. Productive and constructive competition - among scientists, innovators, managers, actors, lawyers, politicians, and the members of just about every other profession - is driven by jealousy.

The eminent Nobel prize winning British economist and philosopher of Austrian descent, Friedrich Hayek, suggested in "The Constitution of Liberty" that innovation and progress in living standards are the outcomes of class envy. The wealthy are early adopters of expensive and unproven technologies. The rich finance with their conspicuous consumption the research and development phase of new products. The poor, driven by jealousy, imitate them and thus create a mass market which allows manufacturers to lower prices.

But jealousy is premised on the twin beliefs of equality and a level playing field. "I am as good, as skilled, and as talented as the object of my jealousy." - goes the subtext - "Given equal opportunities, equitable treatment, and a bit of luck, I can accomplish the same or more."

Jealousy is easily transformed to outrage when its presumptions - equality, honesty, and fairness - prove wrong. In a paper recently published by Harvard University's John M. Olin Center for Law and titled "Executive Compensation in America: Optimal Contracting or Extraction of Rents?", the authors argue that executive malfeasance is most effectively regulated by this "outrage constraint":

"Directors (and non-executive directors) would be reluctant to approve, and executives would be hesitant to seek, compensation arrangements that might be viewed by observers as outrageous."