Anthony de Jasay: A Tale of Two Models, in: The Wall Street Journal Europe, March 2, 2005

French President, Jacques Chirac, has a knack (as he famously put it in 2003 with respect to Poles, Balts and other “lackeys” of America) for “missing good occasions to stay silent”.

Campaigning last month in Barcelona for the new European constitution, he praised it as a fair compromise “between the European and the liberal model” (in American English, he meant classical liberal). Which is to say, he as good as laid it down that a liberal “model” could not be European. It very nearly follows that the European one must be socialist. With this in mind, we may enjoy watching the Battle of the Models.

In the liberal model, profits accrue to the providers of capital and enterprise, wages to the providers of work of all kinds. When profits run ahead of wages, it pays to expand employment, and wages catch up. When profits run dry, the opposite tends to happen. A natural pendulum movement keeps the share of wages and the share of profits in national income swinging back and forth over the economic cycle.

The European model will have none of this. Under it, the shares of profits and wages are first determined by ordinary economic forces. Society is watching the result as it emerges, and keeps adjusting it in a great variety of ways if it does not think it just (or, more prosaically, if the balance of democratic forces pushes for the adjustment).

In practice, for at least three decades now, the net adjustment has invariably been one way-in favor of labor. This is how the intricate system of entitlements of European welfare states has gradually been built up. Translated into moral terms, “social justice” was being done. No one thought of asking whether social justice can cut both ways and if it could, why it always cuts only one way.

As was to be expected, reality in due course caught up with the European model, causing it increasingly to backfire in the face of the politicians who still pretended to steer it. Above all else, the model radically stifles the demand for Tabor, generating a seemingly incurable, endemic unemployment that for years has stuck at around 10% in the major euro-zone economies that still believe in the model, while it is only 4%-5% in Britain and other European users of the rival “liberal” model.

This is a fact even French politicians recognize, although they refuse to accept responsibility for it. It does not, in itself, warrant an article in The Wall Street Journal. But it has intriguing implications that perhaps do, for they have not so far been openly discussed.

Built-in unemployment around 10% is caused by two features of the European model. One is the weight of vast schemes of social insurance financed via payroll taxes, whose cost is greater than their value to the insured wage-earner. Hence the cost of wages exceeds. their value and the demand for labor stays’ chronically deficient.

The other, perhaps less powerful, cause is job protection. Labor laws, meaning well, make the shedding of labor so difficult and expensive that employers are afraid of taking the risk of hiring. They either resort to short fixed term jobs or just make do with the staff they have. Both these features of the European model-social insurance and job protection – are, of course, meant to favor labor over capital. But in practice, they do the exact opposite.

They make the economy function less well, but within a sluggish, sickly environment, they favor capital. They bring about a wholly unintended hiring strike by employers (who would never ever consciously organize one). Labor finds its economic bargaining power reduced to impotence. Companies learn to get by with stagnant or reduced payrolls, productivity rises, profits increase and wages stay fiat. Ironically, the European model does better by the corporate sector than the liberal one, and less well for its own supposed clients – the workers.

Even educated opinion seems to be unaware that this is going on at all, much less the reasons it is going on. Like the secret about the emperor’s clothes, it is still a secret, though it tan hardly stay so for much longer.

Recently, the French oil major Total declared a 2004 net profit of Euro 9 billion. Coming amid a rush of other brilliant earnings reports, Euro 9 billion has proved too much. Within two days, the knee-jerk reaction duly came. French premier Raffarin issued a statement warning French corporations that “if they wish to continue making profits”, they must see to it that their employees share in them. The note of menace, though meant mainly to cheer up public opinion which remains viscerally left-leaning, was audible.

Needless to say (though you would not know from listening to the French chattering classes), the €9 billion did not go in the pocket of a Mr. Total. They were shared by hundreds of thousands of shareholders, the majority being present and future pensioners. Nevertheless, shared they must be again. Oddly, The European model and its conception of “social justice” nowhere provides that when the corporate sector is doing miserably and many companies are bleeding their net worth, there should he sharing too, but in the opposite direction.

Such “sharing” has been known to happen, notably in recent years in the U.S. airline industry, where labor made major wage concessions. But this happened within the liberal model through bargains that followed the normal two-way swings of the profit-wage pendulum. In the European model, there is no pendulum. Labor has been stripped of its natural powers, and all it has left to lean on is a solicitous government that is unwittingly keeping it poorer than it need be.