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. Last Updated: 07/27/2016

Entrepreneurship and the Continental Culture

The nations of continental Western Europe, in the reforms they make to try to raise their economic performance, may prove to be a testing ground for the view that culture matters for a society's economic results.

As is increasingly admitted, the economic performance in nearly every continental country is generally poor compared with the United States and a few other countries that share the United States' characteristics. Productivity in the continental Big Three -- Germany, France and Italy -- stopped gaining ground on the United States in the early 1990s, then lost ground as a result of recent slowdowns and the U.S. speedup. Unemployment rates are generally far higher than those in the United States, Britain, Canada and Ireland. And labor force participation rates have been lower for decades. Employee engagement and job satisfaction reported in surveys are mostly lower too.

It is reasonable to infer that the economic systems on the continent are not well structured for high performance. In my view, the continental economies began to be underperformers in the interwar period, and have remained so -- with corrective steps here and further missteps there -- from the postwar decades onward. There was no sense of a structural deficiency during the "glorious years" from the mid-1950s through the 1970s, when the low-hanging fruit of unexploited technologies overseas and Europeans' drive to regain the wealth they had lost in the war powered rapid growth and high employment. Today, there is the sense that a problem exists.

In my thesis, the continental economies' root problem is a dearth of economic dynamism. The level of dynamism is a matter of how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.

There is evidence of such a dearth. Germany, Italy and France appear to possess less dynamism than do the United States and the others. Far fewer firms break into the top ranks in the former, and fewer employees are reported to have jobs with extensive freedom in decision-making -- which is essential at companies engaged in novel, and thus creative, activity.

I argue that the cause of that dearth of dynamism lies in the sort of economic model found in most, if not all, of the continental countries. There are two dimensions to a country's economic model. One part consists of its economic institutions. These institutions on the continent do not look to be good for dynamism. They typically exhibit a Balkanized/segmented financial sector favoring insiders, myriad impediments and penalties placed before outsider entrepreneurs, a consumer sector not venturesome about new products or short of the needed education, union voting (not just advice) in management decisions, and state interventionism.

The other part of the economic model consists of various elements of the country's economic culture. Some cultural attributes in a country may have direct effects on performance. Values and attitudes are analogous to institutions -- some impede, others enable. They are as much a part of the "economy," and possibly as important for how well it functions, as the institutions are. Clearly, any study of the sources of poor performance on the continent that omits that part of the system can yield results only of unknown reliability.

The values that might impact dynamism are of special interest here. Relatively few of the continent's Big Three report that they want jobs offering opportunities for achievement (42 percent in France and 54 percent in Italy, versus an average of 73 percent in Canada and the United States); chances for initiative in the job (38 percent against 53 percent), and even interesting work (59 percent in France and Italy, versus an average of 71.5 percent in Canada and Britain).

Perhaps many would be willing to take it for granted that the spirit of stimulation, problem-solving, mastery and discovery has impacts on a country's dynamism, and thus on its economic performance. In countries where that spirit is weak, an entrepreneurial type contemplating a start-up might be scared off by the prospect of having employees with little zest for any of those experiences. And there might be few entrepreneurial types to begin with. As luck would have it, a study of 18 advanced countries I conducted last summer found that inter-country differences in each of the performance indicators are significantly explained by the inter-country differences in the above cultural values.

The weakness of these values on the continent is not the only impediment to a revival of dynamism there. There is the solidarist aim of protecting the "social partners" -- communities and regions, business owners, organized labor and the professions -- from disruptive market forces. There is also the consensualist aim of blocking business initiatives that lack the consent of the "stakeholders" -- those, such as employees, customers and rival companies, thought to have a stake besides the owners. There is an intellectual current elevating community and society over individual engagement and personal growth, which springs from antimaterialist and egalitarian strains in Western culture. There is also the "scientism" that holds that state-directed research is the key to higher productivity. Last, there is a strain of anti-commercialism. "A German would rather say he had inherited his fortune than say he made it himself," the economist Hans-Werner Sinn once remarked to me.

In my earlier work, I had organized my thinking around some intellectual currents -- solidarism, consensualism, anti-commercialism and conformism -- that emerged as a reaction to the Enlightenment and to capitalism in the 19th century. It would be understandable if such a climate had a dispiriting effect on potential entrepreneurs. But to be candid, I had not imagined that continental man might be less entrepreneurial. It did not occur to me that he had less need for mental challenge, problem solving, initiative and responsibility.

It may be that, during the 19th and early 20th centuries, there was little opportunity to exercise freedom, which brought few rewards anyway. So the continentals may have learned not to care much about these values. Similarly, it may be that Americans, having assimilated large doses of freedom and initiative for generations, take those things for granted. That appears to be what de Tocqueville thought: "The greater involvement of Americans in governing themselves, their relatively broad education and their wider equality of opportunity all encourage the emergence of the 'man of action' with the 'skill' to 'grasp the chance of the moment.'"

The most basic point to carry away is that the empirical results related here lend support to the Enlightenment theme that a nation's culture ultimately makes a difference for the nation's economic performance in all its aspects -- productivity, prosperity and personal growth.

It was a mistake of the continental Europeans to think that they expressed the right values -- right for them. These values led them to evolve economic models engendering a level of economic performance with which most working-age people are now discontented. Perhaps the way out will require not only reform of institutions but also a cultural shift that returns Europe to the philosophical roots that put it on the map to begin with.

Edmund S. Phelps, a professor at Columbia University, is the 2006 Nobel Laureate in economics. This essay appeared in The Wall Street Journal.