Recently I wrote about the German innovation gap. Last week The Heritage Foundation/Wall Street Journal published its annual Index of Economic Freedom. Germany, along with its Continental peers, placed 19th on the list, well behind the United States, Estonia and Chile. The determining factors in the case of Germany were low scores on Freedom from Government and Labor Freedom. Does a relative lack of economic freedom explain the dearth of innovation in Germany? To some extent it does, since an entrepreneurs need a flexible labor force to launch a successful new business. On the other hand, Sweden has a high level of innovation, yet places lower (21st) in the Index of Economic Freedom.
So perhaps the relative absence of innovative dynamism in Germany has cultural, rather than institutional, causes. Here, I agree with a great deal of what Columbia Univesity professor (and Nobel laureate) Edmund Phelps writes in the Wall Street Journal. Professor Phelps identifies some key entrepreneurial values that are necessary for a culture of innovation such as opportunities for achievement or abilities to take initiatives on the job:
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. Equally, there is the tradition of hierarchical organization in Continental countries. Lastly, there 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.
My blogger colleagues over at the European Tribune strongly disagree with me, but I do think there is a great deal of merit in Professor Phelps’ analysis. Where Professor Phelps falls down is when he posits some genus of "Continental Man" who fears change and innovation. That is a crude and ahistorical construct. We know from the history of postwar Germany that innovation thrived, particularly in the automotive and machine tool industry. Indeed, innovation is what created the Mittelstand economy which was Germany’s mainstay. But a new wave of innovation is needed for Germany to compete in the postindustrial economy. The key, as I said earlier, is an overhaul of the higher education system and the creation of a robust private equity network to support early-stage investment in start-ups.
