WHY IS THE U.S. MORE PRODUCTIVE THAN EUROPE?….Brad DeLong has a bunch of thought-provoking posts up this morning. In one of them he asks:

Why are there such huge differences in productivity growth between the U.S. and mainland Europe–especially in information technology-heavy services? One possible answer is that European firms have, like American ones, invested heavily in information and communications technologies but that they have, in contrast to American firms, not yet figured out how to reorganize their work flow in a way to make their computers more than decorative paperweights. This suggests that Europe’s problem is a deficiency of management consultants. The second possible answer–the one that Alan Greenspan strongly favors–is that firms will not undergo the unpleasant bureaucratic disruptions necessary to increase productivity until they can smell the profits from reorganization, profits that come either from reducing costs (by firing workers) or from meeting greatly expanded boom-time demand. Since the European Central Bank’s policies make a boom in Europe nearly inconceivable, and since it is nearly impossible to fire workers on a large scale in Europe, no productivity boom.

For the entire decade of the 90s I worked at a document imaging company, selling hardware and software in both the U.S. and Europe. The whole point of document imaging is to scan paper and handle it electronically, eliminating the need for armies of clerks to handle it and thus increasing overall productivity.

As Brad suggests, our revenues in Europe were never close to our revenues in the U.S., even after you accounted for smaller populations and a preference for local products. The entire market was simply much smaller and the sales cycle much longer, despite the fact that several of the pioneers of the industry were European. I have a couple of ideas about what was going on:

  • Labor inflexibility might have been part of it ? what’s the point of installing labor-saving equipment if you can lay off workers? ? but most of our American customers didn’t lay off workers either: they kept them, or reassigned them. They didn’t want to lay off people so much as they wanted to grow without having to hire more people. Obviously Europeans could have done the same thing, but most of them simply didn’t have the giddy confidence of American companies that they would continue growing forever. They were less optimistic.

  • They did not trust technology as much as Americans. We designed a new product a few years ago that allowed document imaging to be used over the Internet, and of course we wanted to use the word “Internet” in the product name. The Internet was cool, right? And it would help the stock price.

    Our European sales force was aghast. In Europe (this was around 1998-2000) a word association test for “Internet” would have produced “unreliable,” “slow,” and “expensive,” not “cool” and “high tech.” They wanted us to pick another name. (We didn’t, arrogant American bastards that we were.)

I puzzled over all this for quite a while, and in the end my armchair theorizing added up to this: Europeans on average are actually more rational about technology than we are. They demanded rigorous ROI analysis before they would buy. They recognized that the technology didn’t work as well as the hype. And they had a more realistic view of future growth prospects than Americans did.

But here’s the weird part: it didn’t matter. I think they were actually right more often than American business people were, but the Americans did better anyway. They drank the Kool-Aid, they invested heavily, they reorganized with gay abandon, and then a whole bunch of them went bankrupt. But the ones that stayed around ended up ? by hook or by crook ? with better businesses.

So: optimism and entrepeneurship really do seem to be the big differences here. The Europeans had a more realistic view of life and ended up avoiding both huge successes and huge failures. The Americans were wildly optimistic and took rash chances that often failed ? but the few successes made more difference than the large number of failures.

And when it all gets averaged together, U.S. productivity growth is higher than Europe’s. They could probably use a bit of the cowboy over there.

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