Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

29 July 2015

The Four Top Economies: A Goldilocks Tale


1. Introduction
2. Regulation: Adjustment or Micromanagement?
3. Fixing the watch without moving its hands
4. The problem of labor
5. The effect of enterprise size
6. Conclusion

Introduction

Today everyone knows the four top economies. In order of precedence (and excluding the EU as a whole) they are: the US, China, Japan and Germany.

All but China profess to be capitalistic. And despite the anachronistic name of its New Mandarin Party, China really operates a highly regulated form of capitalism. To be sure, it has residual elements of state capitalism, especially state-owned enterprises (SOES). But unlike Russia, which appears to be steadily augmenting its state sector in the form of thinly veiled crony capitalism, China is trying to wind its SOES down.

So, in essence, the top four economies globally are all mostly capitalist. Free markets are the primary sources of their prosperity and economic power.

But are they all the same? Of course not. If we examine just the last three decades, we can see huge differences in performance.

About a decade ago, the US was on a roll. Not only was it on top. It looked poised to stay there for a while.

But increasingly our own peculiar Yankee form of capitalism is coming to resemble the laissez faire capitalism of our Robber Barons. Ever since Ronald Reagan, we’ve been unwinding the regulatory state that FDR had built into the world’s strongest, wealthiest and happiest nation ever.

The unwinding took almost three decades. And it had ebullient cheerleading to match. No less than our Yankee regulator-in-chief, Alan Greenspan, believed that markets regulate themselves—a blunder he later recanted in Senate testimony. Congress unleashed the dogs of banking, and the Crash of 2008 followed as night the day. Because the US was the big dog, the whole world suffered. China, following its special own rules, perhaps suffered the least.

But now China is having major troubles of its own. Its stock market—once a major source of fascination and profit worldwide—is melting down. And China’s answer, at least at the moment, appears to be direct and indirect price supports. China is meddling in its markets not just by supporting a few SOES, but by direct intervention to save investors money. The prognosis is not good.

Japan has its own unique take on capitalism. Unlike Germany, it never quite unwound the interlocking, cross-owned network of zaibatsu that had facilitated its belated industrialization, and which had formed the backbone of its heavy industry and its preparation for World War II. As new industries like computers and consumer electronics arose, the conglomerate octopuses just reached out, sometimes growing new arms, to embrace them.

And so we have the same Japanese names, and a few new ones, running the gamut from mobile devices, to cars and trucks, and international trade: Fuji, Hitachi, Honda, Komatsu, Ishikawajima-Harima (IHI), Marubeni, Mitsubishi, Nissan, Toyota, and a few others. These octopuses grow, morph and occasionally swap body parts the way bacteria swap genes. But none ever seems to disappear. Is it possible that at least some of Japan’s oft-remarked stagnation since the 1980s derives from these facts, and not just an aging population?

In contrast, Germany is quite different. It still has a few zaibatsu look-alikes, such as Bayer, Siemens and ThyssenKrupp. But for widespread success and prosperity, Germany today relies on smaller parts to a bigger puzzle: its so-called Mittelstand, or small and medium-sized industry.

Furthermore, without a lot of fuss and angst, Germany has given labor a key role in its industry. Perhaps as a result, the ratio of its CEOs’ pay to that of the average worker is about ten. In America, it’s now over 400. Could it be that Germany’s “solution” to the divergence of interests between management/owners and labor is most effective?

We won’t know the answers until we analyze. But we do know one thing right away. While the US and Japan have stumbled badly, and while China is stumbling right now, Germany just seems to keep on ticking, like a fine Swiss (or German) watch. It’s now the undisputed economic master of Europe, having achieved through peaceful, smart organization what it could not achieve through war. And it has achieved that status despite massive residual suspicion and distrust for having started, and having viciously prosecuted, the most horrible war in human history.

So let’s do some analysis. Like Goldilocks and the Three Bears, let’s try to see which brand of capitalism is too hot (too little regulated), which is too cold (too much regulated, or burdened by custom, culture and tradition), and which, if any, is “just right.”

2. Regulation: Adjustment or Micromanagement?

The first thing to understand about regulating capitalism is that a free-market economy is like a fine watch, albeit infinitely more complicated. It’s a complex mechanism with many moving parts.

You can wind it up and let it go. If you’re lucky, it will keep good time. But if things go wrong and it runs fast or slow, you can’t just move the hands to show the correct time.

You can, but the watch will still run fast or slow. So you’ll have to reset it several times a day. And eventually, your moving the hands against the watch’s internal movements will wear out the mechanism, and it will stop working altogether.

That, in essence, is what happened to Soviet Russia. Soviet central planners wanted to fix economic results—the time of day, in our metaphor—by decree, regardless of the mechanism by which economies and businesses operate. The result was a slower and slower watch, which eventually stopped working altogether.

China’s Communist system was similar, with the added burden of Mao’s capriciousness in his dotage, in such bizarre blunders as the Great Leap Forward and the Cultural Revolution. Once Deng Xaioping adopted pragmatism as China’s state religion, jettisoning Maoism and his accompanying cult of personality, it didn’t take more than a decade for China’s growth spurt and “economic miracle” to begin.

Today, with modern economic theory and a bit of math, you can explain these events with rigorous logic, graphs of supply and demand curves, and just a bit of calculus. You can prove, for example, that monopoly produces higher prices and lower output than competition (except in the field of insurance, where pool size matters). Communism, BTW, was all about state monopolies.

You can also show that price regulation can cause private business to lose money continually. The ultimate result is lower efficiency, lower quality, lower output and even bankruptcy, or the need for continual government subsidies to make up the losses.

I used to have fun by subjecting my students in antitrust law to these mathematical-graphical proofs during the first week of class. I did it just to show them that modern economics is not all mumbo-jumbo or, as the great economist John Maynard Keynes once put it, “a dismal science.” There are some things that we now know about economics, and that we can prove rigorously under carefully stated assumptions.

One thing we now know is how to adjust the watch. If you wan’t to change an economic result or outcome, you can rarely, if ever, do so directly. That would be like moving the hands on the watch. You have to go inside the mechanism, understand in detail how it works, make intelligent adjustments, and watch for unintended consequences. Virtually all the last century’s enormous progress in making capitalism work better has been by these means.

The most salient example is what our Yankee Fed and other central banks worldwide now do. After a few centuries of boom-and-bust business cycles, financial panics and all sorts of associated popular misery, we now know how to tame the average boom-bust cycle. When things get too hot, the central bank raises interest rates—the cost of money—to cool things down. When money gets scarce, as it did in the aftermath of the Crash of 2008, the central banks reduce interest rates so that money, the lifeblood of commerce and industry, can flow.

The vital point here is that central banks don’t set interest rates by decree. They don’t tell private banks, or anyone else, what interest rates to charge in lending or to accept in borrowing.

All they do is provide a big new source of money, at interest rates they determine. In good times, private parties come to rely on that source, and so the central banks’ rates become a de facto standard—a cog and gear in the real economy. When times are tough, the central bank becomes the only source of money for many borrowers, so its rates are decisive. This is clever adjustment, not fixing economic results by decree.

Make clever adjustments, with expert help. Don’t try to “fix” the economy by moving the hands on the watch. That’s the basic message of economic learning from the entire last century, including the self-evident failures of Russian and Chinese Communism.

It’s not a difficult message to understand. But most pols apparently have a hard time assimilating it. Richard Nixon, of all people, tried wage and price controls to tame inflation in the seventies. They failed. In 2008, Hillary Clinton proposed freezing mortgage interest rates for five years—another type of price control. That may be partly why she lost; Obama better understood how economies work.

Pols’ yearning for the power to control results directly is understandable. They spend their whole lives dealing with the most unreasonable people, and often coddling and pandering to them, just to get in a position to have some power to do some good. No wonder they want economies to obey them, like recalcitrant campaign flunkies, once they finally win power.

But the world just doesn’t work that way. No matter how powerful you think you are, you can no more “fix” an economy by ordering a result than you can fix a watch by moving its hands to show the correct time. You have to understand the mechanism and make clever adjustments.

We Yanks used to be good at that, when “do it, fix it, try it” was our national credo. Now, it seems, we’re afraid to try anything seriously, whether it’s a moderate adjustment (called “Obamacare”) to a self-evidently broken private health-insurance system or the same sorts of subsidies for wind and solar energy that coal, oil, gas and nuclear energy have long enjoyed.

3. Fixing the watch without moving its hands

People trained as scientists and engineers, including economists, have an intuitive feel for what constitutes adjusting a delicate mechanism, and what, in contrast, is just moving the hands to dictate a result. Unfortunately, the vast majority of political leaders have little or no training in science or engineering.

So they have no such intuitive feel. They may not even understand the metaphor.

They only notable exception is China, which typically has a number of scientists and engineers on its ruling seven-member committee. Once, when the committee had nine members, six of them had scientific or engineering training and one was a lawyer doubling as an economist. (I couldn’t find the biographies of the other two, who were probably military or security personnel, with bios kept secret.)

That being the case, it’s worth some ink to explore our metaphor a bit with a few examples. What constitutes adjusting the watch’s mechanism, and what constitutes just moving the hands?

Before we get to specific examples, two abstractions may be useful. First, the parameters of market performance—price, output, flexibility, risk—are like the hands of the watch. They comprise economic output, or market “performance” in economic terms. Trying to vary, fix, limit or dictate them directly is like moving the hands of the watch. You can try that, but in nearly every case you will have to move the hands again. And in moving the hands you’re likely to damage the delicate gears, cogs and springs inside the watch.

The second useful abstraction is the distinction between incentives and commands. The very notion of free markets depends on voluntary, uncoerced transactions among individuals—usually a lot of them. The collective effect of large numbers of individual, voluntary transactions is what economists have in mind when they talk about Adam’s Smith’s “invisible hand.” So it shouldn’t be a surprise that incentives work better to “adjust” markets than commands, especially if the pols doing the commanding don’t quite understand what they’re doing.

Now we’re ready for some simple examples. Two good ones come from our own Yankee stock-market Crash in 1929, which kicked off the Great Depression.

As the Crash deepened into the Depression, some banks began to fail. So depositors, afraid of losing their money, began to line up outside banks to withdraw it, in a classic fear stampede. Their doing so even put economic pressure on banks that were in no immediate danger of failing. Paradoxically, it created a risk of failure where none or little had existed before.

When FDR first took office as president, he declared a “bank holiday.” That was a command. Depositors couldn’t take money from closed banks, to be sure. But the banks had to open again, some day, and the lines of frightened depositors would appear again. So closing the banks was just moving the hands on the watch.

What eventually “solved” the problem of runs on banks was federal deposit insurance. The government guaranteed personal deposits, up to a certain amount. When a bank failed, it took over the bank, squeezed all the liquid assets out of its carcass, and used them, plus federal money, to make depositors whole.

That was an incentive, not a command. It encouraged depositors to be patient and discouraged their standing in long lines for hours, taking their money out and putting it under their mattresses, where it might be found and stolen.

Not every useful market intervention involves incentives. Some involve regulation. Regulation is not the same as trying to command the markets as King Canute sought to command the tides. Regulation doesn’t mandate a particular result. Instead, it keeps people from doing stupid, risky, self-defeating and dangerous things.

Limits on “margin” for buying securities were a good example. The stock-market “bubble,” or (more accurately) greed stampede, that preceded the fear stampede and Crash of 1929 had been fueled by buying securities on margin, i.e., with borrowed money. So after the Crash, Congress set up the Securities and Exchange Commission (SEC), which put strict limits on how much margin securities buyers could take, i.e., how much they could buy securities with borrowed money.

Those limits couldn’t stop the Crash, which had already happened. Nor could they fend off the Great Depression that followed the Crash. But they could help prevent another similar crash from happening again. So those limits on margin remain in effect today.

You don’t have to have technical training to recognize the difference between moving the hands and fixing the watch. Anyone can learn to do it.

Hillary Clinton is an example. In her 2008 campaign for the presidency, she proposed a five-year freeze on mortgage interest rates. That would have been just moving the hands.

Interest rates are the prices of money. If there’s one thing we know about free markets, it’s that government fixing the price of anything virtually insures unintended consequences. In my antitrust course, I used to show graphical-mathematical proofs that fixing low prices for goods has one or more of three undesirable consequences: (1) bankrupting the firm(s) that make the goods, (2) causing shortages, in which consumers trade time wasted standing in lines for lower prices, or (3) private business devouring massive government subsidies (“corporate welfare”) to stay afloat.

Price is the most basic parameter of market performance. So “fixing” it by decree is just like moving the hands on the watch.

In 2008, Hillary, like many pols, didn’t understand this basic economic point. But she has learned. Her recent major economic address came a long way from trying to command the tides like King Canute. Among other things, she proposed a useful change in our tax codes: lengthening the holding period for paying lower taxes on long-term capital gains. That change would create an incentive system, with the differential between higher taxes on “ordinary income” and lower taxes on long-term capital gains driving investors to make longer-term investments and eschew speculation and get-rich-quick schemes.

This proposal was hardly original with Hillary. I have made it twice on this blog. (See 1 and 2.) But it shows her evolution from a Soviet-style command pol to a leader with some sense of how the economy works. Whether she or anyone else has the political skill to fight Wall Street and quell the speculation that drives it is another matter, more one in Hillary’s ambit of expertise and skill.

Before leaving the subject of not just moving the watch’s hands, we must tackle one final issue: risk. Risk is inherent in free markets. Differing perceptions of risk are what drive voluntary transactions and make free markets possible. So trying to eliminate risk completely is not only impossible and unwise; merely trying to do it usually has serious unintended consequences.

Nevertheless, it’s a legitimate goal of regulation to keep people from being stupid, i.e., taking on excessive and obvious risk. FDR was right to insure personal deposits to avoid bank runs, if only because standing in line to get one’s money out before the next guy would only cause additional, perhaps unnecessary bank failures. Similarly, today, the Fed is right to impose significant capital reserve requirements on our “too big to fail” banks. That’s especially so after those banks showed disregard for risk by taking “liar’s loans,” packaging them and selling them as securities, and then writing insurance on the securities in the form of so-called “derivatives.” In retrospect, at least, it’s absolutely clear that no one in the banking industry had the slightest idea of (or concern for) the systemic risk involved, or the big picture.

So the Fed now “rides herd” on the big banks, making them keep sufficient capital reserves to cover at least foreseeable risks. We can all only hope the Fed does its math right, because those reserves are the strongest, if not the only, barrier holding back another Crash of 2008. The bankers and their friends in Congress have all but pulled the teeth of Dodd-Frank.

Then there’s China. It’s ruling committee has scientists, engineers and economists, not just lawyers. Its New Mandarins, aka the “Communist Party,” may be one of the biggest and most effective political meritocracies in human history. But China’s leaders—perhaps because of their almost complete control over politics—still haven’t learned to fix the watch without moving the hands.

In trying to foster a thriving but risk-free stock market, they made two key blunders, both of which led to the current fear stampede and crash. First, they tried to remove the inevitable (and necessary!) risk from investing by picking winners and even setting the prices for initial public offerings of stock. Since risk and price are both basic market-performance parameters, this was moving the hands, not fixing the watch. Second, they made the very same error that led to our own Yankee Crash of 1929: allowing an orgy of buying stock on margin. If we humans cannot learn from each other’s own not-to-distant mistakes, how can we advance?

4. The problem of labor

Another fundamental economic problem is not how to fix a broken economy, but how to reconcile the divergent interests of managers, owners and labor. This problem is never going away. The conflict of interest and tension that drives it are parts of the human condition.

As long as some people work and others own the workplace and manage and direct their work, there will be conflicts between labor, management and owners. There will be disputes over working hours and conditions and how to share the fruits of what labor, capital and management produce, working together.

Tension and conflict are not only inevitable. They are part of our biological evolution, from the time when we lived in clans of about thirty individuals led by an alpha male. The alpha male (an now an occasional female) may call most of the shots, but how does he or she take care of the rest? Is the clan a happy family or an unequal tyranny? As we Yanks and our culture morph from one to the other, this may be the most important social issue of our time.

When you think of how fundamental this conflict is to our human nature, it seems odd that we’ve done so little to resolve or ameliorate it. We’ve put men on the Moon. We’ve solved the mysteries of the atom and learned how to extinguish our own species. We’ve conquered most diseases caused by pathogens, and we’re on the way to beating cancer, a disease of aging and corruption of our own DNA. We’ve even learned how to tame the boom-and-bust cycles of free-market economies, at least most of the time. (We Yanks dropped the ball in stopping a fear stampede based on worthless mortgage securities and misguided derivatives, but maybe our regulators will have greater skepticism for lucrative, mumbo-jumbo financial “innovations” next time.)

Yet for all this progress in other fields, our species still hasn’t yet begun to solve the most basic human problem of a free-market economy: how to split the pie between labor, management and capital. Not only don’t we have a solution or even a good theory. We don’t even have consensus on a few good things to try.

All we have so far are two extremes. The Communists said the workers must rule, in a “dictatorship of the proletariat.” As I’ve analyzed before, that deceptively simple phrase contains a hole of riddle and contradiction large enough to have sunk two huge national economies: Russia’s and China’s. The other extreme—letting unfettered markets rule, come what may—has produced our new Yankee Guilded Age, with all its extreme inequalities and other discontents.

It’s absolutely amazing how often these two tried-and-failed “solutions” still appear in so-called “serious” politics. In fact, it’s so amazing it reminds us of Albert Einstein’s definition of insanity: trying the same thing over and over and expecting different results.

No serious thinker believes that Communism, a dictatorship of labor, or laissez faire capitalism is a solution to the age-old human problem of reconciling the interests of labor, management and owners. If you think otherwise, just sit back and watch inequality increase, workers get more and more miserable, and our much-vaunted middle class diminish and maybe disappear, as the current GOP uses all its considerable political talent and power to bring back the Gilded Age of a century ago, and to pander to the new Robber Barons, mostly from Wall Street and the fossil fuel industries. All they are doing is impoverishing the middle class and putting Henry Ford’s Model T in reverse.

In the middle of the last century, we Yanks thought we had a solution: collective bargaining. Let workers join together and haggle collectively over their own working conditions and their share of the pie. Isn’t the essence of free markets voluntary agreements on business and economic affairs? Since each worker individually has negligible power to bargain, let them unite and make deals with management and owners collectively.

That was a good idea for a while. The socioeconomic system built on collective bargaining, and the series of laws that implemented it, worked fine for about half a century. They gave us Yanks the richest and least unequal economy in human history.

What killed them was globalization and new technology. Workers can’t bargain collectively when there are other workers, elsewhere in the world, who can’t or won’t bargain, collectively or otherwise, and are willing to take whatever they can get. American business defeated collective bargaining simply by going offshore.

Technology didn’t help. When you have an industry as complex as the auto industry, with millions of workers in assembly plants and parts suppliers, it takes years, if not decades, to work out fair collective bargaining agreements. The process created and requires vast union bureaucracies, and sometimes gave union leaders too much power and an incentive to abuse it.

The whole structure was simply not sustainable in a technological environment in which products, corporations and even whole industries can arise, compete and subside in a few years. Personal computers could rise and peak, for example, and be largely replaced by hand-held mobile devices, in a mere two decades. In comparison, a single industry-wide bargaining agreement lasts about five years.

So globalization and the explosion of technology, working together, killed off collective bargaining. Today, only about a tenth of workers in the United States are unionized. Most of them work in state or local government, whose work cannot be offshored. Other workers resent their generous pension and benefit packages. The bosses, owners, and their bought pols are now using that resentment to divide and conquer—a longstanding and trustworthy plan of the managing and owning classes.

Collective bargaining worked so well for half a century. But it no longer works. Worse yet, socioeconomic thinkers have come up with nothing to replace it. The best they can come up with today is raising the minimum wage.

Don’t get me wrong. I support a raise. I would vote right now to raise the minimum wage throughout the United States to $15, as Seattle has done and New York City has done for fast-food workers.

But raising the minimum wage is basically moving the hands on the watch. It’s not making an intelligent adjustment to a changing, hard-driving, free-market economy. It’s a temporary expedient that, in the best of all possible worlds, will assuage worker suffering at the bottom and give more workers more money to buy the things that they and their fellows produce.

But raising the minimum wage will undoubtedly have unintended consequences. I’m not sure precisely what they will be, and I’m pretty sure that conservative think tanks’ prediction of a precipitous drop in low-wage jobs is overblown.

Nevertheless, this pricey and sudden expedient is sure to put some small businesses out of business and to stress others. More important, to the extent it’s not universal (and most proposals I’ve read about so far are not) it will pit the favored low-wage workers against others.

In the end, raising the minimum wage may only create more granular inequality and more opportunity for the selfish managers and owners to divide and conquer. I support it now because it’s the only solution anyone can see to already ludicrously wide and widespread economic inequality, which is growing like a cancer. We have to do something, and moving the hands on the watch may be all we can do right now.

Germany may have found a better way. German corporate business has one or more labor representatives on its boards of directors. So labor is, in a very real way, part of management. Except in labor-owned businesses, which exist but are very rare, we Yanks have nothing of the kind. We consider labor a separate constituency, inherently and irremediably antagonistic to management.

We Yanks have a lot of talk in law and business schools about employees and customers being “stakeholders” in business. It’s good and useful talk. But it’s notable, and often discordant, because our traditional Yankee view is that business exists to make money for shareholders. If that’s your view—and it is for many, many in the business and political communities—it’s hard to escape the conclusion that lower wages and more miserable working conditions (if they cost less) are good things.

Can we draw a straight line between Germany’s labor representation on corporate boards and its about-ten ratio of CEO’s to average worker’s pay, while our ratio is over 400? Probably not. But the issue is worth some study. After all, it was not some dreamy socialist who figured out how to build a consumer society in which workers could afford to buy the good things they made as laborers. It was Henry Ford.

5. The effect of enterprise size

The size of enterprises also likely makes a difference in both the effectiveness of capitalist enterprise and the treatment of workers. Germany’s forte is Mittelstand: mid-sized business. In contrast, in America we have gigantic corporate behemoths that span the globe. At the same time, we idolize the sole proprietor and small business with ten or fewer employees. So unlike Germany, we tend to focus on the extremes of size.

As I’ve outlined at length in another essay, corporations are a vital step in human social evolution. They bring economic activity down to a size of organization closer to the one we know from our biological evolution: a clan of about thirty governed by an alpha male.

At least modern corporations are much closer to that biological paradigm than the impossible (and often ungovernable) size of modern nation-states, with their hugely diverse populations, often widely differing cultures, and tens or hundreds of millions of voters. If corporations didn’t exist, we would have to invent them, just to get things done efficiently and in a way that feels right to us as we evolved.

But if that’s the socioeconomic function of corporations, then isn’t Mittelstand the optimum size of business? Aren’t gigantic corporations with tens or hundreds of thousands of employees and thousands of offices or locations too big? And isn’t the sole proprietorship or two- or three-person partnership too small, too much like a family with a single, dominant, often bullheaded leader?

If these speculations are right, then Germany may be onto something, and not just lucky in the history of its culture.

I’ve discussed elsewhere the discontents of conglomerate enterprises, and I won’t repeat the discussion here. But it’s worth noting that conglomerates have two big disadvantages. First, they are too big to govern easily or well, simply as a matter of number of people. Second, and more important, they are by definition too big to focus on “sticking to their knitting.”

In fact, they have no knitting, other than the vague and general goal of making money. That’s why GE has rejected finance (except for buyers of its own products) and is in the process of returning to what it does best: designing, making and maintaining advanced heavy-industrial products. That’s also why GE’s stock price is slowly increasing in tandem with its de-conglomeration. Conglomerates simply lack the optimum size and the subject-matter specialization that make incorporation a vital step in human social evolution.

So on a scale of size of enterprises, which of the four economies best meets the Goldilocks test? It’s certainly not Japan, with its business largely organized in huge conglomerate zaibatsu. While these interlocked and cross-owned enterprises have some advantages in resilience (due to the possibility of cross-financing of sudden needs) they have definite disadvantages in ease of governance, nimbleness, and focus.

The United States is probably not the Goldilocks society, either. We Yanks have a lot of businesses of all sizes. But once they get to middle size—if they are successful—they often get gobbled up by a larger enterprise. The tendency to build empires and add needed technology or personnel by acquisition is strong here. Even start-ups, if successful, tend to grow big quickly. Just look at Amazon, Apple, Google, or even Tesla today.

As for China, it’s hard to say. I’m not aware of any authoritative study of business formation in China. China still has too many SOES, and many of them are too huge and diverse. Much of its corporate empires are conglomerates that mimic Japan’s zaibatsu or South Korea’s chaebol. And many of them are built on the achievements, personality and idiosyncrasies of a single leader, usually an alpha male.

So as we look at the world’s four leading economies, only Germany stands out as taking the middle road, not just in the size of its enterprises, but in the degree of genuine concern and accommodation for labor. Although the smallest of the four in absolute terms, is Germany the Goldilocks capitalist economy?

6. Conclusion

Part of the answer comes from comparing the four on a per-capita basis. Here, in tabular form, are the fours’ 2014 GDPs, midyear 2015 populations, and calculated GDPs per capita:

The World’s Four Leading National Economies

Nation2014 GDP
(Trillions of 2014 US Dollars)
Midyear 2015 Population
(Millions)
GDP Per Capita
(US$)
United States17.42309$56,375
China10.361,338$7,743
Japan4.60128$35,938
Germany3.8581.8$47,066


Glancing at these figures makes one thing clear. Germany has by far the smallest population of the four leading economies. It’s not the heavyweight by any means. China is.

But on a per-capita basis, Germany is right behind the United States. And, in the last few decades, Germany had to rebuild itself from the physical devastation of the war it started and lost, the economic devastation caused by Soviet occupation and Communism, and the wrenching changes of reunification after the Soviet Union’s collapse. You might say that Germany, in recent decades, has had a few obstacles to overcome.

But look at Germany today. Is it just a coincidence that it has, by far, the lowest CEO-to-average worker pay ratio, that is, the lowest earnings inequality? Is it just a coincidence that Germany focuses on enterprises of a size that mimics our biological evolution and avoids conglomerates and mega-corporations? Is it just a coincidence that Germany, of all the four, has some specific and unique solutions to getting managers and owners to focus on the needs of labor?

In the last century, state capitalism, laissez fair capitalism, and Communism fought each other to the deaths of tens of millions. Conglomerates still operate worldwide, mostly to satisfy the biological-evolutionary empire-building proclivities of individuals managers and owners. Our species hasn’t, it seems, yet learned much from the mistakes of the past. Under these circumstances, might Germany’s “solutions” be worthy of more careful study?

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