Elephantstrunk

Marginal Revolution: Microfoundations of slow European growth

European industries seem to have higher entry costs, and with them lower turnover rates: 50% of new pharmaceutical products in America come from firms less than ten years old, against only 10% in Europe; 12% of the biggest US firms by market cap at the end of the 1990s were less than 20 years old, against 4% of the biggest European firms.

I believe that becoming a big business in Europe, especially starting in the 1970s, has taken longer than it has in the US. What seems perverse is to ascribe that to “microfoundations” and not to trade barriers, deliberate and otherwise, or the virtues of the US single market. Maybe trade barriers are included in “microfoundations” but that seems a bit of a stretch.

The discrepancy between US and European growth depends upon definition of growth and time period as does the validity of extrapolating a trend.

The case for the US ascendancy is more shaky than the glib presumption on the part of Jane Galt and Tyler Cowen would suggest. Low interest rates, a weak dollar, massive trade deficit and dismal investment returns should be enough to suggest that the story might not be so simple. The intricacies of PPP calculation, recent performance, the details of which sectors are creating jobs, different accounting standards, differing levels of monetisation of the economy and choice of time period make the answer debatable and considerably more complicated.

Even weaker is the attribution of the difference in performance to “microfoundations”. Probably Professor Cowen intends the facts quoted to be “microfoundations” in themselves but Jane Economist is another matter. Nevertheless it’s significance is not what is suggested. It seems transparent that it is harder and slower for a business to grow really large amongst several smaller markets than it would be in one big one. In some ways and, in my estimation, on balance that is a bad thing but it is one upon which Europe has made rapid progress.